FUNDAMENTALS OF ACCOUNTING,

BUSINESS AND MANAGEMENT 1

FOR SENIOR HIGH SCHOOL

DR. MARIFE AGUSTIN-ACIERTO

BENJAMIN A. ABARQUEZ JR.

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 FUNDAMENTALS OF ACCOUNTING,
BUSINESS AND MANAGEMENT 1

FOR SENIOR HIGH SCHOOL

COPYRIGHT 2017
Dr. Marife Agustin-Acierto
Benjamin A. Abarquez Jr.

ISBN: 978-971-9654-85-8

ALL RIGHTS RESERVED. No part of this work covered by the copyright thereon may
be reproduced, used in any form or by any means - graphic, electronic or mechanical,
including photocopying, recording, or information storage and retrieval systems -
without written permission from the publisher and the author.

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Layout design by: Marie Steffany Rulloda Rodriguez

Cover design by: Ricky Guilalas

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 PREFACE

In this book, the students will take a glimpse of what business is like in terms of
the accounting information system; especially for aspiring accountants, entrepreneurs
and business professionals. This will prepare students to appreciate that accounting is
the perfect head-start through which they can fully understand the economic events
affecting various businesses. This will assist them in choosing their career path in
business, management and accounting.

This book illustrates that accounting serves as an aid in understanding economic

events; and that accounting builds simple principles and processes to compile and
record these events. The fundamentals, concepts and processes that are discussed at
the start of this book chose simple illustrations and examples. The discussions and
illustrations are carefully presented in a step by step process, and as the chapter
progresses, these become a bit complicated towards analysis and generation of
reports. It is done this way to prepare students in understanding and solving real
business transactions at later chapters. The basic principles of accounting will serve as
guide to students, not only in the recording of the business transactions but also in the
preparation of the results of operations, which are the financial statements.

At the end of each chapter, test materials are provided to give way for students to
practice what they have learned from the chapters. This will also give them the avenue
of solving simple problems in order to enhance their analytical skills.

Lastly, I would like to thank the Almighty GOD for giving me the wisdom and
knowledge to accomplish this book. My special mention to Ferdinand P. Nocon for
being an inspiration in writing and completing this book; a special thanks to my
supportive loved ones and the JADGC Family; and to the David’s of Pestaway, Arlene
and Jonathan who are always very supportive friends

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 iv

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 ACKNOWLEDGEMENT

We would like to extend our gratitude to the following:

• Ferdinand P. Nocon, for the encouragement to write this book

• To JADGC HOLDINGS

• To our ALMIGHTY GOD, who gives us guidance, wisdom a healthy mind

and body to write and complete this book

- The Authors

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 vi

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 DEDICATION

This book is dedicated to:

• The Almighty GOD

• To Jay Bernardo, who inspired and supported me in my academe profession;

and Dina Bernardo.

• To our family and special friends

• To all students who aspire to become business professionals and entrepreneurs

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 viii

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 TABLE OF CONTENTS

Preface iii
Acknowledgement v
Dedication vii

CHAPTER 1: INTRODUCTION TO ACCOUNTING . . . . . . . . . . . . . . . 1-4

History of Accounting
What is Accounting
Nature of Accounting
Functions of Accounting
Test Materials 7-11

CHAPTER 2: BRANCHES OF ACCOUNTING . . . . . . . . . . . . . . . . 13-15

Financial Accounting
Management Accounting
Government Accounting
Auditing
Tax Accounting
Cost Accounting
Accounting Education
Accounting Research
Examples of Business
Test Materials 19-24

CHAPTER 3: THE USERS OF ACCOUNTING INFORMATION �������������������� 25-28

Internal User
Financial Reports
Management Reports
Internal Users of Financial Information
Management
Employees

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 Owners
External User
External Users of Financial Information
Creditors
Tax Authorities
Investors
Customers
Regulatory Authorities
Example of Users
Test Materials 29-35

CHAPTER 4: THE FORMS OF BUSINESS ORGANIZATION ����������������������� 37-42

Things to Consider in Choosing a Business

Sole Proprietorship
Advantages of Sole Proprietorship Business
Disadvantages of Sole Proprietorship Business
Examples of Sole Proprietorship Business
Partnership Business
Advantages of Partnership Business
Disadvantages of Partnership Business
Some Types of Partnership
Examples of Partnership Business
Corporation Business
Advantages of Corporation Business
Disadvantages of Corporation Business
Examples of Corporation Business
Test Materials 43-47

CHAPTER 5: THE TYPES OF BUSINESS ACCORDING

TO ACTIVITY. . . . . . . . . . . . . . . . . . . . . . . . . . 49-54

Service Business
Advantages of Service Business
Disadvantages of Service Business
Examples of Service Business

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 Merchandising Business
Advantages of Merchandising Business
Disadvantages of Merchandising Business
Examples of Merchandising Business
Manufacturing Business
Advantages of Manufacturing Business
Disadvantages of Manufacturing Business
Examples of Manufacturing Business
Business Requirements
Test Materials 55-59

CHAPTER 6: ACCOUNTING CONCEPTS AND PRINCIPLES �������������������� 61-63

Basic Concepts and Principles of Accounting

Test Materials 65-67

CHAPTER 7: THE ACCOUNTING EQUATION. . . . . . . . . . . . . . . . 69-76

Effects of Business Transaction in the Accounting Equation

Test Materials 77-90

CHAPTER 8: TYPES OF MAJOR ACCOUNTS. . . . . . . . . . . . . . . . 91-106

Major Types of Accounts

The Assets Accounts
Tangible Assets
Intangible Assets
Liabilities
Current Liabilities
Non-Current Liabilities
Capital Owner’s Equity

Revenues or Income
Expenses
Chart of Accounts
What is an Accounts?
Chart of Accounts for a Merchandising Business
Chart of Accounts for a Service Business
Test Materials 107-115

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 CHAPTER 9: THE BOOKS OF ACCOUNTING . . . . . . . . . . . . . . 117-125

The Journal Books of Accounts

The Ledger Books of Accounts
Basic Format of Book of Accounts
Recording and Posting of Transactions
Test Materials 127-139

CHAPTER 10: THE CYCLE OF ACCOUNTING. . . . . . . . . . . . . . 141-173

The Business Transactions

Characteristics of Business Transactions
Nature of Business Transactions
Accountable Forms
Types of Source Documents
The Debit and Credit of Accounting
Rule of Debit and Credit
The Accounting Cycle or Accounting Process
Journalizing and Posting Business Transactions
The Accounting Period
Adjusting Entries
Accured Revenues
Unearned Revenues
Accured Expenses
Prepaid Expenses
Depreciation
Allowance for Uncollectible Accounts
The Financial Statements
Formats of the Basic Financial Statements
Test Materials 175-234

CHAPTER 11: THE ACCOUNTING CYCLE OF A

SERVICE BUSINESS. . . . . . . . . . . . . . . . . . . . 235-260

Service Business
Rule of Debits and Credits
Business Transactions of a Service Business
Journalizing Business Transactions in a General Journal

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 Posting of Journal Entries to the General Ledger
Preparation of Trial Balance
Preparation of Worksheet
Preparation of Adjusting Journal Entries
Statement of Income
Statement of Financial Position
Statement of Changes in Capital
Statement of Cash Flow
Closing of Entries
Post-Closing Trial Balance
Test Materials 261-282

CHAPTER 12: THE ACCOUNTING CYCLE OF A

MERCHANDISING BUSINESS . . . . . . . . . . . . . . 283-307

Nature of Merchandising Business

Accounts of a Merchandising Business which are
Different from Service Business
Inventory System of a Merchandising Business
Perpetual Inventory System
Periodic Inventory System
Business Transactions of a Merchandising Business
Journalizing of Business Transaction in the Special Journals
Sales Journal
Purchase Journal
Disbursement Journal
Receipt Journal
General Journal
Posting of Journal Entries to the General Ledger
Posting of Journal Entries to the Subsidiary Ledger
Trial Balance
Statement of Cost of Sales
Adjusting Entries
Worksheet
Financial Statements
Statement of Income
Statement of Financial Position

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 Statement of Changes in Capital
Statement of Cash Flow (Indirect Method)
Closing of Entries
Post-Closing Trial Balance
Test Materials 309-341

REFERENCES 343

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 CHAPTER

1
INTRODUCTION TO
ACCOUNTING

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Narrate the history and origin of accounting;
☞ Define the meaning of accounting;
☞ Describe the nature of accounting;
☞ Explain the functions of accounting in business; and
☞ Identify activities and events where accounting is used
in making business decisions.

HISTORY OF ACCOUNTING
The accounting practice dated back to the history of mankind. I believed that
when we existed in this world, we were already equipped with skills and intelligence
to help us survived. Without these skills, we could not be above all that existed.
We could not be masters over these creations without these skills, intelligence and
expertise.
It started when the human beings lived in caves, in trees, and in other safe
dwellings; wherein their main occupation was to collect root crops, vegetables and
fruits and to prey birds and animals for their living. In doing these activities in a day
to day basis, they would likely keep records of their harvests and preys to keep tract
of inventories while scheduling some of their time doing other things. They did this
by drawing lines and figures on the stones, on walls and ceilings inside the caves; on
the bark of the trees, on skins of animals or making knots out of the vines or creeping
grasses.

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 As time passed by, man had to leave the caves and started living in groups
or tribes, started cultivating crops and kept domestic animals. They kept records of
their harvests, poultries, and animals by making markings and writings on the walls
of their abodes, on cut woods or making knots out of the ropes or vines. During these
times, they would normally cultivate and raise animals and poultries for their own
consumptions and indulge on a little exchange of goods.
Then societies gradually expanded and the demand of men for their necessities
in terms of food and basic needs started to increase. There became new systems as
man started to do the “barter system” of goods when other needs cannot be provided
by their own produce. In ancient Europe, man kept records by marking accounts on
the back of the doors, by drawing marks on the mud walls, write these on the skins of
animals or by marking on the sticks from wood branches or on chopped woods.
Later in time, a new system was introduced as the medium of exchange in
doing transactions- the use of money made from minerals. In these monetary activities,
merchants and other types of businesses emerged and trading between persons,
family and institutions became widespread using cash or credits. Maintaining records
was necessary for all transactions.
Then on the 15th century, modern accounting was born due to sudden increase
of trade and commerce. The necessity of formulating specific policies and guidelines in
maintaining accounts, books and records was desired. So in 1494, in a book written by
Luca de Pacioli who was an Italian priest and philosopher, he included in it a section
that explained the basic principles of Double Entry System of Bookkeeping wherein
a value that is received should equal to the value that is parted with. In this principle,
one may earn a profit or a loss in the transactions depending on the satisfaction of
the parties involved in it. In a short period of time, this practice of bookkeeping was
adapted in different parts of the world.
Since then, accounting being an art and a science; different methods of keeping
accounts were practiced by different industries; following the double-entry system
invented by Luca de Pacioli. With the progress of trade and commerce and help of
technology, accounting has evolved to what it is about on the present day.

WHAT IS ACCOUNTING?
In the early years, accounting was regarded as both an art and a science. It had
been defined as “the art of recording, classifying and summarizing in a significant manner in
terms of money, transactions and events which are, in part at least, of financial character, and
interpreting the results there of. ”
Let’s discuss the content of the above meaning to fully appreciate why it was
such defined that way:
a. “Art” is a part of our knowledge that helps us attain our objectives, design processes
and policies, design appropriate forms and improved controls. Our goal in the
business is to know the financial results. This is accomplished by way of recording,
classifying and summarizing the business transactions in the best way.
b. “Recording” of transactions in various ways, according to the accounting standards
and as required according to the size of the organization.

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 c. “The art of classifying” which is the grouping of transactions or entries of the same
nature at one account.
d. “The art of summarizing” business transactions, because an organization has to
prepare the financial statements.
e. “Summarizing in a significant manner” means that summarizing must be done a
way wherein there is sense of importance and must suit the purpose for which it
is done. It should also be user friendly.
f. “In terms of money” because money is the measure and basis in recording the
transactions.
g. “Transactions and events which are, in part at least, of financial character”. Accounting
deals with financial transactions and events only that will change the financial
position of that organization. The financial character is being measured in terms
of money.
h. “Interpreting the results”. Accounting is not only on the aspect of recording,
classifying, summarizing of transactions and events, and the preparation of
financial statements. The financial results are interpreted in such a way that the
results can be understood and appreciated by at least non-accounting users.
The users who are the management, investors and other parties interested in
the business will use these interpretations in the decision-making and may also
interpret the accounting information for their own purpose.
At present, accounting has become a discipline, no longer regarded as an art.
If we say discipline, the practice is bound with sets of accounting standards and
rules associated with the Code of Ethical Conduct of accountants. These accounting
standards are contained in the Philippine Accounting Standards (PAS) and Philippine
Financial Reporting Standards (PFRS).
The accounting practice of an organization has its own processes and uses
special accounts unique to their company and industry. But when reporting the results
to agencies that require the reports, the financial statements should conform with the
accounting standards’ format; to make it generally acceptable.
Accounting has passed a long historical process that it already affects our
business and social lives. It became a profession that involves acquiring a degree and
formal education to specialize in its fields. It is seen now as a “service activity.” It is a
link between business activities and decision-makers, thus regarded as the language
of the business. Business enterprises can only communicate themselves to users and
decision makers through accounting.
The new definition of accounting, in line with the practice of accountancy is:
“Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities that is intended to useful in making economic
decisions, in making reasoned choices among alternative courses of action.“
The above new definition has not lost the content and essence of the old
definition. The emphasis is more on its “service activity”, a more appropriate reference
to accounting rather than as an “art”.

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 NATURE OF ACCOUNTING
The nature of accounting has been defined in so many ways. Basically, it is a
service to account for economic activities and events that has value. It is expressed in
monetary terms.
Let see how accounting has evolved from the scriptures in caves to what it is
now using new technologies.
• It started as a science. In the history of men where mankind had relied on their
special skills and natural-born intelligence, accounting was simply invented
by them in a way that they could understand it. They had formulated means
on how to record their activities.
I believed that when we began to exist, each of us possesses unique skills and
intelligence different from one another. One has the skill of a scientist, a skill
of an entrepreneur, a skill of a manager, a mathematician and etc. These skills
would normally come out naturally and these were used in the olden times as
a science.
• It was defined as an art. The art is on the recording aspect, classifying,
summarizing and interpreting. Man is a natural born artist; in this way art has
been applied to accounting more effectively. When art is applied, processes
and policies are made uniquely for the business including management reports
which are customized as needed by the users. Though in the end, standard
financial reports are prepared to conform with certain accounting standards.
• It became a discipline. This is because accountancy became a profession and
the practice of it is governed by sets of rules and accounting standards. The
accountant is also bound by the Code of Ethical Standards.
• In this era of millennium, accounting has become an information system.
Whether it is a manual system or a computerized system, accounting is a whole
information system. This information system accepts not only financial data
or transactions but also non-financial transactions. In this way, information
generated would only not pertain to the monetary activities but also on
activities surrounding the financial transactions which are also essential in
the decision making; like the quantities of goods being sold or purchased, the
suppliers’ and customers’ information details, the details of attendance and
lates on payroll transactions, the employees’ details, etc. These details in the
information system are also needed to draw and prepare in-house management
reports like sales reports, HR report, purchasing reports, etc.

The Functions of Accounting include:

1. Identifying and analyzing source documents which enter into the information system.
These are activities that are relevant to the business operations. The business
activities are normally transactions and events in source documents that
transpired in its day-to-day activities. These transactions are called inputs
which are processed into the information system and are generated as financial
and management reports.

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 2. Recording the source documents which are economic activities into the books of
accounts of the organization. The function of recording is called bookkeeping. It
is described as the recording of financial transactions that are appropriately
classified, in the accounting books of an organization, by either manual means
or computerized means. In the accounting information system, this is called
transaction processing.
3. Preparing the financial and management reports. The financial reports are: (1).
Statement of Financial Position, also commonly called the Balance Sheet, (2)
Statement of Income, (3) Statement of Cash Flow, (4) Statement of Changes in
Equity. The management reports are normally in-house reports needed by the
organization’s various departments like Sales Reports, HR Reports, Ageing of
Accounts Receivables or Payables and other in-house reports that are essential
in the review of the business financial performance and operations.

4. Analyzing and interpreting the financial reports for different users who have interest
in the business and who will use these in their decision making. The interpretations
are either in the form of vertical or horizontal analysis and financial ratios,
using the classified financial statements. The interpretation will further be
discussed in part 2 of this book.
In an organization, rendering a timely and correct decision is very important
to correct past mistakes and formulate new goals and targets. This decision-making
process is being aided by accounting itself. Without accounting, users in the organization
will not be able to provide improvements in the organization and achieve their visions
and goals.
Some of accounting’s results that are helpful in making business decisions are
as follows:
1. The use of Ageing Report of Accounts Receivable. This report is important in
determining the paying habits of the customers and whether the credit policies
are properly enforced or not.
2. The use of Ageing Report of Accounts Payable. This report provides information
on how effective cash payments to suppliers or vendors are managed.
3. The use of trend reports and analysis of sales performance. This data will
assist the sales group in the organization determine whether sales targets are
achieved or not.
4. The use of expense reports and analysis. This report is important in determining
whether expenditures conform with budget.
5. The use of accounting in monitoring inventories. Inventories are important
assets in the company as cash. There should be proper monitoring of
inventories to avoid obsolescence and losses, and to make sure that these are
moved quickly to accelerate the quick inflows of cash.

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 TEST MATERIAL 1-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Encircle the correct answer.

1. It is a service activity that provides quantitative information which is financial in

nature.

a. Bookkeeping
b. Accounting
c. Journalizing
d. Selling

2. It is the language of the business.

a. Bookkeeping
b. Accounting
c. Journalizing
d. Selling

3. The double entry system of accounting was first established by:

a. An Indian Philosopher
b. An Italian Priest
c. An Asian Monk
d. A Middle East Prophet

4. The book of Luca de Pacioli was published in:

a. 1500
b. 1495
c. 1650
d. 1494

5. Accounting is defined as:

a. An art
b. A science
c. A discipline
d. All of the above

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 6. In the definition of accounting, the transactions and events are expressed in:

a. Monetary value
b. Qualitative nature
c. Quantitative means
d. None of the above

7. An information system may mean as:

a. A manual system
b. A computerized system
c. A customized system designed to fit accounting
d. All of the above

8. Analyzing and interpreting means:

a. Expressing it in a vertical analysis

b. Expressing it in financial ratios
c. Expressing it in a horizontal analysis
d. All of the above

9. The management reports that are generated by an organizations is solely for:

a. In-house reporting
b. External reporting
c. Outside agencies’ reporting
d. All of the above

10. Accounting information is helpful to:

a. Decision makers
b. Management users
c. People who have interest in the business
d. All the above

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 TEST MATERIAL 1-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect.

__________ 1. Accounting speaks for the business through its sets of languages.

__________ 2. Accounting is an art and not a service activity.

__________ 3. The book of the Italian priest Luca de Pacioli was published in
1495.

__________ 4. The function of recording transactions is called bookkeeping.

__________ 5. Management: analyzes the organization’s performance and

position and taking appropriate measures to improve the company
results.

__________ 6. The practice of double-entry bookkeeping system was introduced

by an Indian Philosopher.

__________ 7. The trend of sales is one aspect of accounting that is used in

decision making.

__________ 8. The Ageing Report of Accounts Payable is used to determine

whether credit policies are effectively enforced.

__________ 9. Inventory is an asset that is susceptible to obsolescence and losses

if not properly monitored.

__________ 10. One of the functions of accounting is to identify business activities

relevant to the operation of an organization.

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 TEST MATERIAL 1-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect.

__________ 1. The history of accounting dates back to the history of mankind

wherein man relied on the natural-born intelligence than on
experiences.

__________ 2. The double entry system was included in a book written by an

Italian priest in 1494.

__________ 3. Accounting is both an art and a science.

__________ 4. One function of accounting is Io interpret source documents by

way financial ratios.

__________ 5. Accountancy became a profession and is not governed by sets of

rules and standards.

__________ 6. One example of a financial statement is the Balance Sheet.

__________ 7. The Ageing of Accounts Receivable will provide information on

how effective cash is managed in terms of payments to suppliers.

__________ 8. The information system of accounting in the millennium accepts

financial transactions only.

__________ 9. Accounting is the language of the business.

__________ 10. The interpretation of the financial statement is either in the form of
vertical or horizontal analysis and financial ratios, using classified
financial statements.

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 CHAPTER

2
BRANCHES OF
ACCOUNTING

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Differentiate the branches of accounting;
☞ Explain the kind or type of services rendered in each of
these branches;
☞ Identify business organizations that require accounting
services; and
☞ Identify the type of accounting services that matches
with the branches of accounting.

BRANCHES OF ACCOUNTING
The accounting practice specializes on several areas. It does not concentrate
itself on the keeping of records and providing financial reports. It deals on other areas
where businesses have required it. The accountants, after getting a profession, also
specialize on these fields making it their areas of expertise.
At present, accounting has not confined itself to record keeping but has
eventually spread its branches to all corners of business and commercial activities.

The following are the Branches of Accounting:

1. Financial Accounting - this is a branch of accounting wherein it focuses primarily on
the preparation of the financial statements. These financial statements, which serve
as the result of the operations, are used by business organizations to communicate
with the internal and external users.

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 This particular area of accounting is mostly practiced by a Certified Public
Accountant (CPA), who is licensed by the Professional Regulations Commission (PRC).
The reports are normally required by the owners or shareholders of the organization,
government entities, financial institutions, creditors and suppliers, because these are
the official reports that represent the business organization’s financial performance.
2. Management Accounting - in a business organization, management is very much
dependent on the accountant in all level of activities such as, cost and quality
control, budget preparation, planning, sales and financial forecast, etc. which are
relevant to making strategies and rendering decisions. The in-house information
generated by the accountant for specific purposes will serve as benchmarks to
company’s performance.
The reports in this area are commonly required by various departments of the
organization. These are normally customized reports according to the needs of the
internal users to evaluate the organization’s operations performance.
3. Government Accounting - this branch of accounting is practiced by all government
agencies and its employees using their sets of policies, accounts and processes
normally different from private business enterprises. The practice of these
accounting is reviewed by the Commission on Audit (COA).
Government is an independent body with sets of rules, laws and regulations
that are enacted by Congress in conformity with the Philippine Constitutions. The
regulatory agency that has the police powers in the practice of government accounting
is the Commission On Audit (COA); while private businesses are policed by the Securities
and Exchange Commission (SEC) and the Bureau of Internal Revenues (BIR).
4. Auditing - is defined as a “systematic, independent and documented process for
obtaining audit evidence (records, statements of fact or other information which
are relevant and verifiable) and evaluating it objectively to determine the extent to
which the audit criteria (set of policies, procedures or requirements) are fulfilled.
There are two types: (1) External audit, which requires outside auditors from
the business organization purposely to seek independent opinion; (2) Internal audit, a
function of which is done by an employee of the business organization whose function
is to examine internal records and help improve internal processes.
The area of external auditing is carried out by Certified Public Accountants
in the public practice. These accountants are accredited by the Board Of Accountancy
(BOA). They are the only accountants who can affix their signatures in the audited
financial statements that are required by the regulating agencies. They are normally
auditing firms like Sycip, Gorres & Velayo (SGV) or accountants who has the profession
in public practice. This profession requires independence which means that the CPA is
not associated with the organization being subjected to the audit.
While the external auditing is a BOA accredited, the internal auditing can be
carried out by an employee of the organization. He can be a CPA or a graduate of
accountancy as long as the person is equipped with auditing skills and experiences.
The internal auditor normally reports directly to the President or Chairman of the
Board.

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 5. Tax Accounting - this is the branch of accounting that focuses on the preparation
of tax returns as required by the Bureau of Internal Revenue (BIR). Accountants
can also employ themselves as tax practitioners and consultants who specialize on
taxation.
Accountants in a business organization can also learn tax accounting because
this is a requirement by the BIR, which gives trainings, seminars and guidelines to
businesses on the matters of tax compliance. Other businesses hire consultants or
accountants specializing on this field. This is called outsourcing.
6. Cost Accounting - this branch deals on collating cost information that is useful to
set prices of goods and services for sale. The costs gathered are also essential in
the analysis of improving the quality and efficiency of the business organization’s
operations and in setting price targets to compete with existing markets.
The accountant practicing this area of accounting is employed in a manufacturing
set-up. The job requires accumulation of costs from various departments to become
the factory costs of a particular product.
7. Accounting Education - the persons involved in the primary role of molding future
accountants are educators in the accounting practice. These educators teach the
basic theories and practices which will become the basic foundation and learnings
to future accounting professionals.
Certified Public Accountants (CPA) can also be in the academe to teach and
mold future accountants. This profession requires also accreditation from the Board
of Accountancy (BOA) for academic practice.
8. Accounting Research - is research on the effects of economic events on the process of
accounting, and the effects of reported information on economic events. It involves
a broad range of research areas like financial and management accounting, auditing
and taxation. Accounting research is carried out both by academic researchers and
by practicing accountants.
There are practicing accountants who specializes on research and development
and offer this service to business organizations which are into new business, expansion,
merger and consolidation, buy-out or as a requirement by an external party.
Below are some examples of businesses that require the above type of
accounting services:

Name/Type of Business Accounting Services Required

• A Sari-Sari Store Financial Accounting
Management Accounting
Auditing
Tax Accounting
• A Drug Store Financial Accounting
Management Accounting

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 Auditing
Tax Accounting
• Schools & Universities Financial Accounting
Management Accounting
Auditing
Tax Accounting
Accounting Education
Accounting Research
• Paper Manufacturer Financial Accounting
Management Accounting
Cost Accounting
Auditing
Tax Accounting
• Grocery Store Financial Accounting
Management Accounting
Auditing
Tax Accounting
• Barbershop and Salon Financial Accounting
Management Accounting
Auditing
Tax Accounting
• Hardware Store Financial Accounting
Management Accounting
Auditing
Tax Accounting
• Bakery/Bake Shop Financial Accounting
Management Accounting
Cost Accounting
Auditing
Tax Accounting
• Vulcanizing Shop Financial Accounting
Management Accounting
Auditing
Tax Accounting

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 • Restaurants/Carenderias Financial Accounting
Management Accounting
Cost Accounting
Auditing
Tax Accounting
• Gasoline Station Financial Accounting
Management Accounting
Auditing
Tax Accounting
• Convenient Store Financial Accounting
Management Accounting
Auditing
Tax Accounting

The above examples of businesses in a particular community require not only

one area or branch of accounting, but two or more; depending on the management’s
needs and the requirements of regulating agencies. Hence, several accountants in
specialized fields can be hired by one big company alone.
But common to Small and Medium Enterprise businesses (SME), one accountant
practices multi-tasking responsibilities on several areas of accounting.

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 18

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 TEST MATERIAL 2-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Encircle the correct answer:

1. Branch of accounting that focuses on the preparation of financial statements.

a. Management Accounting
b. Financial Accounting
c. Auditing
d. Tax Accounting

2. This branch of accounting deals on collating cost information that is useful to

set prices of goods and services for sale.

a. Auditing
b. Government Accounting
c. Cost Accounting
d. Accounting Education

3. This branch of accounting tells that the in-house information generated by

the accountant for specific purposes will serve as benchmarks to company’s
performance.

a. Financial Accounting
b. Management Accounting
c. Tax Accounting
d. Government Accounting

4. This is the branch of accounting that focuses on the preparation of tax returns as
required by the Bureau of Internal Revenue (BIR).

a. Management Accounting
b. Financial Accounting
c. Auditing
d. Tax Accounting

5. This is carried out by Certified Public Accountants in the public practice who
should be accredited by the Board of Accountancy (BOA):

a. External Auditing
b. Internal Auditing

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 c. Government Accounting
d. Tax Accounting

6. This profession is carried out by Certified Public Accountants in the academe.

a. Government Accounting
b. Auditing
c. Accounting Education
d. Financial Accouting

7. This type of business requires cost accounting.

a. A drug store business

b. A manufacturing business
c. A sari-sari store business
d. None of the above

8. This type of business requires management accounting.

a. A manufacturing business
b. A bake shop business
c. A restaurant business
d. All of the above

9. This type of business requires education accounting.

a. A barbershop business
b. A hardware store business
c. A school business
d. None of the above

10. This is a type accountant’s profession in the Commission on Audit.

a. Government Accounting
b. Accounting research
c. Tax accounting
e. Auditing

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 TEST MATERIAL 2-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect:

__________ 1. Goverment accounting practice is reviewed by the Securities and

Securities Commission (SEC).

__________ 2. Auditing can be internal or external.

__________ 3. The accounting research can be performed by academic researchers

only.

__________ 4. The function of external auditing can be performed by Certified

Public Accountants who are not accredited by the Board of
Accountancy.

__________ 5. Cost accounting can also be practiced even in a restaurant business.

__________ 6. Certified Public Accountants in the public practice can also perform
internal auditing.

__________ 7. Management accounting is a branch of accounting wherein it

focuses primarily on the preparation of the financial statements.

__________ 8. Financial accounting reports is required by owners who are part of

the management of a business organization.

__________ 9. Government entities require management reports from business

organizations.

__________ 10. One of the functions of accounting is to identify business activities

relevant to the operation of an organization.

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 22

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FABM Revised.indd 23
TEST MATERIAL 2-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Check the appropriate column for the accounting areas required by the listed type of business.

Financial Accounting Auditing Tax Cost

Accounting Education Accounting Accounting

1. Julie’s Bakeshop ______ ______ ______ ______ ______

2. Procter & Gamble ______ ______ ______ ______ ______

3. Ace Hardware ______ ______ ______ ______ ______

4. SM Department Store ______ ______ ______ ______ ______

5. Jollibee Corp. ______ ______ ______ ______ ______

6. Toyota Phils. ______ ______ ______ ______ ______

7. David’s Salon ______ ______ ______ ______ ______

8. Mercury Drugstore ______ ______ ______ ______ ______

9. Perpetual College ______ ______ ______ ______ ______

10. Mini Stop ______ ______ ______ ______ ______

11. Pizza ut ______ ______ ______ ______ ______

12. Goldilocks ______ ______ ______ ______ ______

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 13. Rapide Auto Center ______ ______ ______ ______ ______

FABM Revised.indd 24
14. Sarabia Optical Clinic ______ ______ ______ ______ ______
15. Unilever Phils. ______ ______ ______ ______ ______
16. United Laboratories ______ ______ ______ ______ ______
17. 7 - Eleven ______ ______ ______ ______ ______
18. SM Department Store ______ ______ ______ ______ ______
19. Red Ribbon Bakeshop ______ ______ ______ ______ ______
20. University of the Philippines ______ ______ ______ ______ ______

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 CHAPTER

3
THE USERS OF ACCOUNTING
INFORMATION

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Define and explain the internal users of accounting;
☞ Define and explain the external users of accounting;
☞ Identify the type or decisions made by each group of
users; and
☞ Describe the type of information needed by each group
of users.

USERS OF ACCOUNTING INFORMATION

The accounting information is prepared to satisfy various users of the business
organization. These users have different interests and purposes in the business; be it
for decision making or a requirement.
This chapter discusses the different types of user of financial information
which is the result of a business operation. This financial information is presented in
such a way that it can communicate to different users. Accounting as the language of
the business takes this role.
The users of the accounting information are generally classified into: (1) Internal
Users, (2) External Users.
Internal Users, as the word itself suggests, are persons working within the
organization. They make actions and decisions pertaining to the internal activities of
the business.

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 Internal users are the persons who are responsible in making a business fail or
grow. They are the decision makers, the support group, the revenue generators or the
front-liners. Each person or group has specific role to play in the organization, which
is driven by rewards or promotion when the business succeeds.
The financial information needed by the internal users takes in the form of
financial reports and management reports.
The financial report which is in the field of financial accounting is prepared by a
financial accountant. The reports, which will be discussed thoroughly in part 2 of this
book, are;
a. Statement of Financial Position or also known as Balance Sheet
b. Statement of Income or Statement of Comprehensive Income
c. Statement of Changes in Equity
d. Statement of Cash Flows
e. Notes to the Financial Statements
The above financial reports are used by the stakeholders, financial institutions
and regulating agencies. Internal users who used these reports are the decision makers.
The management report which is in the field of management accounting is
prepared by the management accountant. This may take in the form of a financial or
non-financial data which are customized according to the needs of the users.
Examples of the reports are:
a. Revenue or Sales Reports which are used by the sales group to monitor whether
sales are achieved or not.
b. Human Resources Reports which are used by the HR group to analyze trends on
remunerations and benefits, to monitor tardiness and absences and to study
ways of recruitments and reasons/causes of resignations.
c. Ageing of Accounts Receivable Reports which are used by the Credit/Collection
and Treasury groups to monitor the accounts receivables and to determine
availability of funds.
d. Ageing of Accounts Payable Reports which are used by the Purchasing/Payables
and Treasury groups to manage the funds available.
e. Cost Reports which are used by various cost centers to manage the cost and
expenses of the organization.
f. Inventory Reports which are used by Production and Warehouse groups to
monitor the level of inventories.
The internal users of the financial information are:
• Management for analyzing the organization’s performance and position and
taking appropriate measures to improve the company results. They are the
decision makers.

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 Management uses trends, benchmarking and horizontal, vertical and financial
ratio analysis to monitor the company’s performance. The management team is
usually called the captain of the ship. They are normally the highest paid individuals
in the organization whose employment is at the discretion of the owners. They are
highly paid because of the risk in the tenure of their employment which depends
on trust and confidence of the owners.
• Employees for assessing business organization’s profitability and its consequence
on their future remuneration and job security.
Employees play important roles in the organization. In some businesses where
their source of income is service, the employees are considered as one of the
business resources. Although there are reports that are confidential in nature, some
reports like the management reports are readily available for the consumption of
the employees’ interest which is essential for the growth of the business.
One of the employees’ goals in the organization is to contribute profitability
by generating revenues and to incur minimal costs. This is in line with the
organization’s mission and goals. Another employees’ goal is to seek rewards and
promotions by doing better in their respective responsibilities. They also show
loyalty and good service to ensure their job security.
• Owners for analyzing the viability and profitability of their invested capital
and determining any future course of action.
The owners have short-term and long-term goals for their business. One of
the short-term goals is to achieve beyond the profit targets. This goal is in line
with management and employees goal. Profit is used by the owners to reward
management and employees for good performance.
But the long-term goals are what that matter most to the owners. This is to
maximize their wealth- which means investing their income into short or long
term investments to generate more returns for themselves and for their business.

External Users are business enterprises or individuals who have interests in

the business but do not directly involved themselves in the daily activities of the
organization.
The external users use financial information to assess the status and viability
of the organization in respect to their needs. They don’t participate in the decision
making but they influence the decisions of management. The reports they need from
the organization are the financial reports which are submitted to and recognized the
governing bodies.
The external users are:
• Creditors for determining the credit worthiness of the organization. Terms
of credit are set by creditors according to the assessment of their customers’
financial health and performance. Creditors include suppliers as well as
lenders of funds such as banks and other financial institutions.
• Tax Authorities for determining the correct tax payments and tax returns which
will be filed by the business organization. Example of these tax authorities are

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 the Bureau of Internal Revenues (BIR), Bureau of Customs (BOC), the local and
municipal agencies, etc
• Investors for analyzing the feasibility of investing in the business organization.
Investors want to make sure that they can earn a reasonable return on their
investment before they will commit any financial infusion of resources to the
organization.
Business organizations, which are lacking of funds and need expansions or
improvements in their operations, seek investors to infuse funds to their business.
The investors use financial reports to determine the soundness and financial health
of the organization.
• Customers for assessing the financial position of its suppliers which is necessary
for them to maintain a stable source of long term supply.
Customers are the life blood of the business because they are the main source of
revenues. They require financial reports to determine whether the organization’s
goods or products or services are worthy to patronize or has excellent qualities to
pass on to consumers.
• Regulatory Authorities for ensuring that the business organization’s disclosure
of accounting information is in accordance with the rules and regulations to be
complied with.
These regulatory agencies include the Securities and Exchange Commissions
(SEC), Bureau of Internal Revenues (BIR), Bangko Sentral ng Pilipinas, etc.
Below are list of some users of financial information that are categorized as
internal or external.

INTERNAL USERS EXTERNAL USERS

- Accounting Assistant - Banks
- Chief Accountant - Insurance Agencies
- Treasury Manager - Vendors
- Admin Assistant - Consumers
- Human Resources Manager - Stock Players or Investors
- Sales Representative - Local municipalities
- Warehouseman - Contractors
- Production Manager - Franchisors
- Chief Finance Officer - Holdings Companies
- Vice Presidents - Auditing Firms
- President
- Board of Directors
- Internal Auditors

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 TEST MATERIAL 3-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Encircle the correct answer.

1. He is the user of accounting information who determines the credit worthiness of

the organization.
a. Creditors
b. Owners
c. Investors
d. Regulatory bodies
2. He is the user of accounting information who uses information for analyzing the
feasibility of investing in the business organization.
a. Customers
b. Tax authorities
c. Investors
d. Employees
3. He is the user of accounting information who uses it for assessing the financial
position of its suppliers which is necessary for them to maintain a stable source of
long term supply.
a. Customers
b. Tax authorities
c. Investors
d. Employees
4. He is the user of accounting information that uses it for decision making.
a. Management
b. Employees
c. investors
d. All of the above
5. He is the user of accounting information that uses it for assessing business
organization’s profitability and its consequence on their future remuneration and
job security.
a. Owners
b. Employees
c. Creditors
d. Customer

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 6. He is the user of accounting information that assesses whether business
organization pays correct taxes.
a. Tax Authorities
b. Regulatory Authorities
c. Investors
d. Owners
7. He is the user of accounting information which ensures that the business
organization’s disclosure of accounting information is in accordance with the rules
and regulations to be complied with.
a. Tax Authorities
b. Regulatory Authorities
c. Investors
d. Owners
8. This is an example of an internal user.
a. Management
b. Owners
c. Employees
d. All of the above
9. This is an example of an external user.
a. Owners
b. Management
c. Banks
d. None of the above
10. He is the user of accounting information that uses it to determine any course of
action for the business organization to protect his invested capital.
a. Owners
b. Management
c. Investors
d. Creditors

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 TEST MATERIAL 3-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect:

__________ 1. The employees play important part in the decision making of the
business organization..

__________ 2. An example of external user is the owner.

__________ 3. Examples of internal users of accounting are customers, creditors,

investors, government agencies.

__________ 4. The role for determining the credit worthiness of the organization
is with the customers.

__________ 5. Management analyzes the organization’s performance and position

and taking appropriate measures to improve the company results.

__________ 6. The customers are the life blood of the business because they are
the main source of revenues.

__________ 7. One of the short term goals of owners is that maximization of

wealth.

__________ 8. Internal users make actions and decisions pertaining to the internal
activities of the business.

__________ 9. Investors analyzes the viability and profitability of their investment

in their business and determines any future course of action,
whether to close it or not.

__________ 10. External users are business enterprises or individuals who have
interests in the business but do not directly involved themselves in
the daily activities of the organization.

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 32

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 TEST MATERIAL 3-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Identify the following whether an INTERNAL or EXTERNAL USER.

1. Insurance Brokers ___________________

2. Payroll Assistant ___________________

3. Financial Consultant ___________________

4. SGV Auditing Firm ___________________

5. Banco de Oro ___________________

6. University of Sto. Tomas ___________________

7. Comptroller ___________________

8. Sales Manager ___________________

9. Investment Houses ___________________

10. Financial Institutions ___________________

11. Factory Worker ___________________

12. Bookkeeper ___________________

13. Sales Consultants ___________________

14. Corporate Lawyer ___________________

15. Board of Accountancy ___________________

16. Accounting Supervisor ___________________

17. Office Secretary ___________________

18. Cayetano Law Office ___________________

19. Procter and Gamble Phils. ___________________

20. Chief Executive Officer ___________________

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 34

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 TEST MATERIAL 3-4
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Identify if the following users need (1) FINANCIAL INFORMATION and (2)
MANAGEMENT INFORMATION.

1. Insurance Brokers ___________________

2. Payroll Assistant ___________________

3. Financial Consultant ___________________

4. SGV Auditing Firm ___________________

5. Banco De Oro ___________________

6. University of Sto. Tomas ___________________

7. Comptroller ___________________

8. Sales Manager ___________________

9. Investment Houses ___________________

10. Financial Institutions ___________________

11. Factory Worker ___________________

12. Bookkeeper ___________________

13. Sales Consultants ___________________

14. Corporate Lawyer ___________________

15. Board of Accountancy ___________________

16. Accounting Supervisor ___________________

17. Office Secretary ___________________

18. Cayetano Law Office ___________________

19. Procter and Gamble Phils. ___________________

20. Chief Executive Officer ___________________

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 CHAPTER

4
THE FORMS OF BUSINESS
ORGANIZATION

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Know the different forms of organization;
☞ Differentiate the forms of business according to their
type and function; and
☞ Identify the advantages and disadvantages of each
form.

FORMS OF BUSINESS ORGANIZATION

When you will be into entrepreneurial business, the first decision that you
will make is to select the form of business that you will structure. This includes the
rights and obligations of the capitalists, the definition of ownership controls, personal
liability and how funds will be sourced out.
The decision of going into a business is a long-term goal and the process is
also long and tedious considering the bureaucratic processes in some government
agencies. In this instance, it is right to consult with accountants, lawyers and financial
advisors as these persons are equipped with knowledge to structure a business that is
right for you.
In making the right decision and choice for a right business, the following may
be considered:
☞ The size and nature of business that you want to structure
☞ The extent of ownership control.
☞ The business risks and exposures.
☞ The taxes to be paid up.

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 ☞ The economic conditions that suit the type of business that you will
build up.
☞ The return of your investments.
☞ The availability of resources which are the funds, assets and people.
There are three basic forms of business organization: Sole Proprietorship,
Partnership and Corporation.

1. SOLE PROPRIETORSHIP
Most of small businesses start as sole proprietorship which is also called as Single
Proprietorship. Some of these businesses grow big and become big corporations.
One best example is the SM Group owned by Henry Sy. The individual who owns
the business runs the business on a day-to-day basis, normally hands-on on most
of its operations. He also assumes full responsibility of the business in the eyes of
law and the public; as the owner and the business is just considered as one and the
same person.
This form of business organization has the following advantages:
a. It is owned by a single person
b. It is easy to organize
c. It requires very low capital
d. The owner has complete control of the business and may make decision as
he sees it fit.
e. It has no special legal requirement upon its formation.
f. The profits go a hundred percent directly to the personal account of the
owner.
g. The business is easy to dissolve or liquidate if desired.
The sole proprietorship has also the following disadvantages which a
prospective entrepreneur will consider:
a. The owner is personally liable for the obligation of the business because
the owner and the business itself are not regarded as separate entities.
b. There may be difficulty in raising funds and are often limited to using
funds from personal account or personal loans.
c. There may be hard time attracting high-caliber employees as most
prospective employees are motivated to seek employment with large
corporations.
d. Some personal benefits of the owner are not directly deductible from
business income unless these are related to the business itself.
The major advantage of setting up a sole-proprietorship business is that it
requires very low capital to start it; that is why, it is very easy to organize. It has
very few requirements- like needing only to register the company’s name with the
DTI and secure permits to operate.

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 Since the business and the owner are regarded as one, anything personally
attached to the owner like SSS, Pag-IBIG, PhilHealth, TIN, and other personal
resources are used to represent with government agencies and other external parties
who have business interest with the company. This is one major disadvantage
because it will mean that the liabilities of the company extend to the personal
properties and resources of the owners.
Some examples of sole proprietorship business are as follows:
☞ Auto Repair Shop
☞ Beauty Salon
☞ Sari-sari Store
☞ Tailoring Shop
☞ Gasoline Station
☞ Hardware Store
☞ Rice Dealer
☞ Generika Drug Store
☞ Barbershop
☞ Vulcanizing Shop
☞ Meat and Fish Store

2. PARTNERSHIP
In a partnership set-up, two or more persons share the ownership of the
business. Like the sole proprietorship, the liabilities of the business extend to the
personal resources of the owners. The profits are shared with the partners based
on the partnership agreement. Contained in the partnership agreement are also
provisions on how future partners are admitted or bought out, how to dissolve the
partnership, how capital may be contributed and how services of the partners may
be assigned or allocated. it is formed by two or more individuals called partners
This form of business has the following advantages:
a. It is easy to organize though it requires time to establish it.
b. It is formed by two or more individuals called partners where the ability of
raising more funds is favorable.
c. The profits go directly to the personal accounts of the partners.
d. Employees seeking employment may be attracted to join the business as
there are chances to become a partner.
e. The partnership business will benefit from partners who have
complementary skills to run the business which will not anymore require
outside parties.
The partnership has also the following disadvantages:
a. It requires a larger amount of capital.
b. The partners are personally liable for the obligations of the business

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 c. There is a written agreement between partners on how the business affairs
will be handled; hence, the partners are jointly and individually liable for
the actions of other partners.
d. The profits will be shared by all partners.
e. Disagreement will likely occur in times of decision making.
f. The partnership has limited life as it may end up upon the death or
withdrawal of a partner.
These are some types of partnership that prospective entrepreneurs may
consider:
1. General Partnership. In a general partnership, the partners divide the
liability and responsibility of managing the business. The profits or losses
are also divided in accordance with the partnership agreement or in any
cases when there is none, equal sharing is assumed.
2. Limited Partnership. This partnership has limited liability. When we say
“limited”, it means that some of the partners have liabilities up to the extent
of their contributed capital or have limited inputs as regard to management
decisions. Forming this type of partnership is more complex than forming
a general partnership.
3. Joint Venture. It is just like a general partnership, but the time is normally
limited and it entails a single project of operation. If there is a repetition of
the joint venture activity, this will be recognized as on-going partnership
requiring to be registered as a continuing partnership wherein the
accumulated assets will be distributed upon dissolution.
Just like the sole-proprietorship business, the partnership bears similarities in
terms of advantages and disadvantages. The partnerships will only differ from the
sole-proprietorship as regards to the capital requirements and its registration. Its
business registrations is regulated by the Securities and Exchange Commission
(SEC) which has more strict requirements and regulations than the DTI.
Some examples of partnership business are as follows:
☞ Auditing Firms, like Sycip Gorres Velayo and Co., Punongbayan &
Araullo, PriceWaterhouseCoopers/isla Lipana and Co. etc
☞ Accounting and Bookkeeping Firms
☞ Law Firms and Offices
☞ Some Merchandising Companies

3. CORPORATION
This form of business organization is larger than the partnership. It normally
has a minimum of 50 years legal business life, it has a life of its own and cannot
be dissolved easily even when the ownership changes. It is run by the Board of
Directors who are appointed or elected by the shareholders.
It is considered by law to be a unique entity as it can represent itself to other
personalities; so it can be taxed, it can be sued and it can enter into contractual
agreements. It has separate personality distinct and separate from the owners.

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 It has the following advantages:
a. It is a business owned by shareholders who have limited liabilities and
can only be held accountable up to the extent of their investments to the
corporation.
b. It has legal personality separate and distinct from the owners.
c. It can conduct business in its own name and represent itself as a person.
d. The ownership is by means of shares of stocks and shareholders receive
their share of income through dividends.
e. It can raise additional funds by selling stocks.
f. A corporation may deduct the cost of benefits it provides to officers and
employees.
Though it appears that it is more advantageous to have a corporation than
forming a sole proprietorship and partnership businesses, this form of business
has also the following disadvantages:
a. The process of incorporation requires longer time, money and lots of
requirements.
b. This form of business requires a lot of reports and paper works as it is
being monitored by the state and local agencies.
c. Incorporating may result in higher taxes. As dividends paid to shareholders
are not deductible from business income, this income is taxed twice- for a
corporate tax and for a final tax (a tax to shareholders).
Organizing a corporation is more advantageous than organizing a sole-
proprietorship and partnership. In many aspects of its personality, the corporation
can act on its own, represent itself to internal and external parties and have a
minimum life of 50 years.
Having its own juridical personality, it is strictly registered and regulated by
the Securities and Exchange Commission (SEC) and subject to the standards of
accounting. But unlike the first two forms of organization, the ownership is by
shares of stocks, wherein the control of the business is through the ownership of
majority of the shares of stocks and the distribution of income is through dividends.
Some examples of corporation business are as follows:
☞ Colgate Palmolive Phils.
☞ Toyota Motors Phils.
☞ SM Group of Companies
☞ United Laboratories Phils.
☞ VY Domingo Jewelers
☞ Philippine Steel Corporation
☞ Bank of the Philippine Islands
☞ GMA Network, Inc.

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 ☞ Makati Medical Center
☞ Philex Mining Corporation

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 TEST MATERIAL 4-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Indicate the form of the business to which the following belongs. Write SP= if a
Sole Proprietorship business, PR= if a Partnership business. CP= if a Corporation business.

_______ 1. Robinsons Department Store _______ 16. Book Publisher

_______ 2. Car dealers _______ 17. Furniture Makers

_______ 3. Philip Morris Tobacco Co. _______ 18. National Bookstore

_______ 4. Jollibee Corporation _______ 19. Gasoline Stations

_______ 5. Levis Strauss _______ 20. Bus Companies

_______ 6. Beauty parlor _______ 21. Dress Shop

_______ 7. Warehousing business _______ 22. Poultry Dealers

_______ 8. Toyota Philippines _______ 23. Star Cinema

_______ 9. Accounting & Auditing firms _______ 24. Mister Doughnut

_______ 10. Colgate Palmolive Phils. _______ 25. ABS-CBN

_______ 11. Mega Sardines _______ 26. Selecta Ice Cream

_______ 12. Colleges and Universities _______ 27. Julie’s Bakeshop

_______ 13. Appliance Store _______ 28. Mercury Drugstore

_______ 14. Supermarkets _______ 29. Printing Press

_______ 15. SPA and Massage _______ 30. News Stand

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 TEST MATERIAL 4-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect.

__________ 1. A sole proprietorship business is owned by two or more individuals.

__________ 2. A partnership can conduct business in its own name and represent
itself as a person.

__________ 3. The owners of a corporation are called shareholders and own

shares of stocks.

__________ 4. One of advantages of a partnership is that it is easy to organize but

takes more time to establish it.

__________ 5. The distribution of profits to partnership in a partnership is called

dividends.

__________ 6. A sole proprietorship business is a unique entity that is separate

and distinct from the owners.

__________ 7. A joint venture is just like a general partnership, but the time is
normally limited and it entails a single project of operation.

__________ 8. A sole proprietorship is a business that will be registered in the

Securities and Exchange Commissions.

__________ 9. One of the advantages in setting up a partnership is that it has

limited life and can be dissolve by a withdrawal or death of a
partner.

__________ 10. One example of a partnership is a law or accounting firm.

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 TEST MATERIAL 4-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: List down at least five (5) each business establishments in your community, group
in the following forms: (a) Sole Proprietorship, (b) Partnership, (c) Corporation.

SOLE PROPRIETORSHIP

1. __________________________________________________

2. __________________________________________________

3. __________________________________________________

4. __________________________________________________

5. __________________________________________________

PARTNERSHIP

1. __________________________________________________

2. __________________________________________________

3. __________________________________________________

4. __________________________________________________

5. __________________________________________________

CORPORATION

1. __________________________________________________

2. __________________________________________________

3. __________________________________________________

4. __________________________________________________

5. __________________________________________________

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 CHAPTER

5
THE TYPES OF BUSINESS
ACCORDING TO ACTIVITIES

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Differentiate and compare the types of business
according to activities;
☞ Identify the advantages and disadvantages of each
type of business; and
☞ Identify the business requirements for each type of
business.

TYPES OF BUSINESS
There are several types of businesses depending on how a person sees it. In the
accounting practice, these are only classified into three according to their activities.
These are: (1) Service activity, (2) Merchandising activity, (3) Manufacturing
activity.
A Service Business is a type of business that sells intangible products (products
with no physical form) by providing services to customers. This type of business is
easy to organize as it only requires persons and machines to do the services. It also has
fewer costs to look into and is simpler to manage.
If your service business requires machines to do most of the services it, it
needs less manpower. And if your business requires people to do it, almost all of your
resources are manpower.
While some of these services like bookkeeping and accounting, housekeeping
or tutoring requires small investments as these only require special skills or knowledge

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 of the individuals, other service areas require bigger investments of money. These are
lawyers, doctors, certified public accountants and other professionals who make their
living by providing professional services to clients.
There are also persons into entrepreneurial businesses who launch service
business that require extensive investments in terms of money, facilities or equipment.
These businesses take the form of partnerships or corporations.
There are advantages in setting up a service business. Some of these are:
1. It doesn’t maintain an inventory. Inventories are susceptible to losses and
obsolescence if not properly monitored.
2. It will only require expertise in your field. One can eventually expand by
way of replicating these expertise and skills with other people who will
eventually form part in your organization.
3. Costs can easily be managed as this does not require processes and
complicated costings.
4. Profit can easily be managed because revenues are normally determined
by a “cost plus” method.
The disadvantages are:
1. It cannot do variations of products other than expanding into another level
of services.
2. It is difficult to sell as some consumers prioritize goods or products rather
than availing of services as they can do it by their own; other than services
requiring special skills. Services requiring special skills command higher
prices.
3. Valuation may be difficult. Unlike businesses which sell hard products or
assets that can be seen, service being an intangible product is somewhat
complicted to determine or to value at.
4. Less demand of services during difficult times. In times of difficulty,
availing of services is less prioritized than buying goods, products or assets.
5. There would likely a high level of getting “mistrust” from customers when
a particular service fails.
6. It is hard to sell. Unlike a product, if you put it on a shelf you will just
wait for an impulsive buyer. For the services to sell, you have to convince
potential customers, which will require positive personality, extensive
research and data.
The following are some businesses in the service industry:
1. Professional Services. These are doctors, lawyers, dentists, accountants,
architects, engineers, pharmacists.
2. Business Services. These are consulting, training, recruitment, financial
planning, advertising, computer and data processing, banks.

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 3. Transportation Services. These are taxi services, car rental, trucking, delivery
services, limousine services.
4. Personal Services. These are pet grooming, health clubs, catering, salon,
barbershops, tailoring, photography, funeral parlors, wedding planners,
hospitals.
5. Restaurant and Lodging Services. These are restaurants and carenderias,
hotels, resorts.
6. Social Services. These are child day-care services, individual or family care
services.
7. Maintenance Services. These are plumbing, electrical, landscaping, garbage
collection, appliance and equipment repair, automotive repair.
8. Utility Services. These are lighting services, water services , communication
services, internet providers.
9. Entertainment Services. These are film making, actors or actresses, comedy
bars, TV shows.
10. Information Technology. These are business into computers, computer
applications and software programs. They also produce computer
peripherals that are necessary in the computer business.
11. Warehousing and Logistics. These are business into warehousing of products
and goods and moving them out for deliveries

A Merchandising Business is a type of business that buys products at wholesale

price and sells the same at retail price without changing the form. Merchandisers can
customize or improve the physical appearance of the product to commend higher price
while maintaining its physical form. They are known as “buy and sell” businesses.
They make profit by selling the products at prices higher than their purchase costs.
Examples are general merchandisers like groceries and hypermarkets, department
stores, appliance centers.
This business can cater all types of consumer products purchased from the
manufacturing companies; thus it can maintain wide varieties of products to sell. The
downside is that it will maintain huge inventories, thus retaining slow-moving capital
investments.
Some of the advantages and disadvantages of setting up a merchandising business are
the following:
1. High sales will result if merchandising is done the right way. To have it noticed
by consumers is important; this is by way on how the products are displayed
and positioned.
2. Merchandises are not manufactured but purchased at their original state and
sold without changing the form. The additional cost on this is the freight cost
and sales commissions.
3. Merchandise can be moved swiftly if handled by professional visual
merchandiser. Knowing how to arrange shelves, create attractive displays

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 so that best-selling items stand out, combining colors and using lighting are
critical to consider.
4. The cost component is high in terms of maintaining high level of inventories,
the shipping and delivery costs, the space needed for the store and warehouse,
research and product development.
5. It maintains high volume of inventories for re-sale which requires stringent
monitoring.
6. A merchandising business relies on finding and keeping of customers. Sales
would not depend on a one time sale transaction but on how to keep the loyalty
of the customers to patronize the product.
7. Selling merchandises require developing new products, and this is expensive
and time consuming. Instead of manufacturing it themselves, merchandising
businesses design their own products and have it manufactured by a third
party. In this way, they will have to ensure that their products are distinctively
different from other products to maintain the customers’ base.
The following are some businesses in a merchandising industry:
1. Retail Stores they purchase products and resell then without changing the
forms.
2. Bookstores they sell books and magazines from publishers and printers.
3. Drugstores they sell drugs, medicines and vitamins from drug manufacturers.
4. Convenient Stores they sell variety of products normally at 24-hrs service.
5. Department Stores they sell variety of goods like apparel, shoes, bags, etc
that are normally on consignment basis.
6. Gasoline Stations they sell processed gas, oil and lubricants for vehicles and
household use.
7. Hardware Stores they sell products from the steel industry.
8. Appliance Centers they sell appliances of various varieties.

The Manufacturing Business buys products with the intention of using them
as raw materials in making a new product. Thus, there is a transformation of the
products purchased, by combining these elements to form into a finished product. A
manufacturing business combines raw materials, labor, and factory overhead in its
production process. The manufactured goods will then be sold to customers.
This type of business can design or produce products at its own choice, thus
catering a large potential market for larger revenue generations. It only maintains
large inventories, costs and resources requiring large investments.
Like any other businesses, a manufacturing type of business has also some
advantages and disadvantages, as follows:
1. One advantage is job satisfaction. This satisfaction is not only for prospective
employees because manufacturing business creates volume of jobs but also for

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 the owners. Manufacturing will create new products that will satisfy owners
because an item of their creation will be used and patronized by the consumers.
2. Another advantage is the demand of the product. As population grows and
increases, the demand of consumer products for basic and other necessities
also increases. This is so true in this age of technology.
3. One disadvantage is the cost of investment. Starting a manufacturing business
will required large capital expenditures, high overhead and start-up costs for
research and development and inventory intensive.
4. Another disadvantage is the reliance on raw materials. Manufacturing business
uses raw materials to convert it into finished products that can be sold in the
market. These raw goods can be scarce or expensive at times, and this business
has no option but buy these at high costs than ceasing production.
Some examples of companies in the manufacturing industry are as follows:
1. Chemical Manufactures. These businesses manufacture chemical products
for industrial and household use.
2. Energy Manufacturers. These are businesses that produces petroleum
products from hydro carbon or companies that convert a raw mineral
product into energy.
3. Industrial manufacturers. These are businesses into many kinds of machinery
used in farm and factories, machines used in many households and
industrial products such as hardware, glass and paper products.
4. Consumer Products Manufacturers. These are businesses that produce
products for individual and household consumptions like food, cleaning
products, personal care products, etc.
5. Automotive Manufacturers. These are businesses that manufacture vehicles
as a land-based transportation.

Business Requirements
The business requirements for the above types of business are common to all. It
will only differ on some special requirements from government agencies that regulate
it as there are industries that will abuse because their products are highly sought or in
demand by consumers or because these are the basic needs.
Some of the special requirements will be applied to businesses that are into:
1. Generation, collection and distribution of electricity which will require
endorsement from the Department of Energy (DOE).
2. Domestic and international air passenger and freight transport which will
require endorsement from the Civil Aeronautics Board (CAB).
3. Tele-communication services which will require endorsement from the
National Telecommunications Commission (NTC).
4. Commercial banking and other monetary activities which will require
endorsement from the Bangko Sentral ng Pilipinas (BSP).

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 5. Professional organizations which will require endorsement from the
Professional Regulatory Board.
6. Amusement and recreational activities which will require endorsement from
Philippines Charity Sweepstakes Office (PCSO).
7. Charitable, rehabilitation and counselling services which will require
endorsement from the Department of Social Welfare and Services (DSWD).
8. Private pre-school, elementary, secondary, college, universities and vocational
schools which will require endorsement from the Department of Education
(DepEd), Commission on Higher Education (CHED) and TESDA.
The common business requirements applicable to all are:
1. Registration with the following:
Department of Trade and Industry (DTI) for the trade name of sole proprietorship
business.
Securities and Exchange Commission (SEC) for partnerships and corporations.
This is where the name, business purpose, capitalization and by-laws/
agreements of the companies are registered.
Bureau of Internal Revenue (BIR) for the tax identification number, employees
and books of accounts.
Home Development Mutual Funds (HMDF), Phil. Health Insurance (PhilHealth),
Social Security Services (SSS) for the identification number and employees.
And other regulatory agencies that require the registration of the business,
products and services, copyrights and trademarks/tradenames.
2. Application of business permits from the local municipalities where the
business will conduct the business.
3. Registration with other government agencies which will regulate the business
in the industry that they will be doing the business.

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 TEST MATERIAL 5-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Indicate the type of the business to which the following belongs. Write S = if a
service business, MR = if a merchandising business. MF = if a manufacturing business.

_______ 1. Robinsons Department Store _______ 16. Boutiques

_______ 2. Motorcycle Dealers _______ 17. Furniture Makers

_______ 3. Philip Morris Tobacco Co. _______ 18. National Bookstore

_______ 4. Pizza Hut _______ 19. Gasoline Stations

_______ 5. United Laboratories _______ 20. Car Rental

_______ 6. Barbershop _______ 21. Tailoring Shop

_______ 7. Warehousing Business _______ 22. Hog Dealers

_______ 8. Mitsubishi Philippines _______ 23. Star Cinema

_______ 9. Law firms _______ 24. Dunkin Doughnut

_______ 10. Procter & Gamble Phils. _______ 25. GMA Network

_______ 11. Ligo Sardines _______ 26. Magnolia Ice Cream

_______ 12. Colleges and Universities _______ 27. Julie’s Bakeshop

_______ 13. Appliance Store _______ 28. Watsons Drugstore

_______ 14. Hypermarkets _______ 29. Printing Press

_______ 15. Massage Parlor _______ 30. News Stand

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 TEST MATERIAL 5-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect.

__________ 1. Setting a manufacturing business is costly as it requires high

overhead and high volume of inventories.

__________ 2. One example of a service business is a retail store.

__________ 3. Service business sells tangible products to customers.

__________ 4. Merchandising business can customize their products and improve

it to command high price but not change its form.

__________ 5. Industrial manufactures produce products for individual and

household consumptions like food or personal care products.

__________ 6. Merchandising business maintains high volume of inventories for

re-sale that requires stringent monitoring.

__________ 7. A manufacturing business buys raw materials and converts this

into finished products by changing its form.

__________ 8. Valuation is difficult in the service business.

__________ 9. One disadvantage of a manufacturing business is job satisfaction

by employees and owners.

__________ 10. The calculation of profit in service business is a “cost plus” method.

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 TEST MATERIAL 5-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: List down at least five (5) each business establishments in your community, group
in the following forms: (a) Service Business, (b) Merchandising Business, (c) Manufacturing
Business.

SERVICE BUSINESS

1. __________________________________________________

2. __________________________________________________

3. __________________________________________________

4. __________________________________________________

5. __________________________________________________

MERCHANDISING BUSINESS

1. __________________________________________________

2. __________________________________________________

3. __________________________________________________

4. __________________________________________________

5. __________________________________________________

MANUFACTURING BUSINESS

1. __________________________________________________

2. __________________________________________________

3. __________________________________________________

4. __________________________________________________

5. __________________________________________________

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 CHAPTER

6
ACCOUNTING CONCEPTS
AND PRINCIPLES

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Identify the generally accepted accounting principles;
☞ Explain the various accounting principles and
concepts; and
☞ Differentiate the difference of each concepts and
principles according to its importance in accounting.

ACCOUNTING CONCEPTS AND PRINCIPLES

Accounting, being the language of business, can effectively communicate with
the use of its concepts and principles. These are widely accepted sets of rules and
standards that guide accountants in the application of accounting and preparation of
the financial statements. These are called the “Generally Accepted Accounting Principles
(GAAP)”.
The principles of accounting are also called the “characteristics of the financial
statements”. This is because as accounting is prepared in according to the concepts and
principles, the results of operations which are the financial statements will bear these
concepts and principles at their characteristics.

Some of the basic concepts and principles are:

Relevance
A relevant information helps users of the financial statement provide a decision
correctly, be it in present situations or future circumstances. These decisions are
based on past performance of the organization and correct past mistakes.

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 Reliability
Information is reliable if a user of the information can depend on it to be
accurate and faithfully represented. Material omissions in financial statements can
reduce the reliability of information contained in the reports.
Matching Principle
This principle requires that revenues and expenses must be recognized and
charged to the income statement in the accounting period in which these are
earned (revenues) and incurred (expenses). This means that any revenues earned
during a period should be charged with corresponding expenses that relates to it.
Timeliness
Timeliness in accounting is a principle that refers to the need that all accounting
information be presented to the users of the financial statement on time so that
they can make the rightful decisions.
Neutrality
Being free from bias is the requirement of Information contained in the financial
statements on neutrality. The information should reflect a view which is fair and
balanced.
Faithful Representation
The financial statements should contain faithfully represented transactions
and events during a period. Faithfull representation means that these transactions
and events should be accounted for in their true economic substance rather than
its legal form.
Prudence
When we say prudence, it requires that accountants should exercise a degree
of caution in making significant estimates on the valuation of assets and recording
of income (not overstated) and expenses (not understated); apart from the careful
adoption of the policies and standards.
Completeness
Information contained in the financial statements is reliable if these are
completely provided to the users and decision makers. This should be complete in
all material respects.
Single Economic Entity Concept
This suggests that companies associated with each other, a parent-subsidiary
relationship, through the virtue of a common control should be regarded as a single
economic unit and therefore should present one consolidated financial statement
to represent the group.
Money Measurement Concept
This means that transactions and events when recorded in the books of accounts
should be measured in monetary terms.

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 Comparability
Comparability in the financial statement means that one accounting period
(present) must be comparable to another period (past) in order for the users to
determine meaningful conclusions and decisions about the financial affairs of the
organization.
Consistency
The concept of consistency means that accounting methods must be applied
consistently; the same methods and techniques must be used in future similar
situations. In changing its accounting policis, one must properly disclose it in the
notes to the financial statements.
Understandability
The transactions and events must be presented in the financial statements in a
way that are easily understandable by the users, who can easily comprehend the
accounted/recorded economic activities that are summarized in the reports.
Materiality
This means that information in the financial statements should have no material
omission or misstatement that could influence the economic decisions of the users.
Materiality has no absolute value; its relevance depends on the decision making
needs of the users.
Going Concern
The financial statements are prepared on the assumption that a business entity
will operate as a going concern or will continue to operate in the foreseeable future
without the management’s intention to liquidate the organization or to stop its
operational activities.
Accruals Concept
The accrual basis of accounting means that the financial statements are
prepared where income and expenses must be recognized in the accounting
periods to which these are incurred.
Substance Over Legal Form
In order to present the true affairs of the organization, the transactions and
events must be recorded in the financial statements in their economic substance
rather than just in their legal form.
Revenue Recognition Principle
This principle of accounting refers to the application of accruals concept in the
recognition of revenue (income). Under this principle, revenue is recognized when
it is earned regardless whether payment for the sale has been received or not by
the seller.

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 TEST MATERIAL 6-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Identify the following.

_______________1. This principle in accounting refers to the need for the accounting
information to be presented to the users in time to fulfill their
decision making needs.
_______________2. This requires that accountants should exercise a degree of
caution in the adoption of policies and significant estimates
such that the assets and income of the entity are not overstated
whereas liability and expenses are not under stated.
_______________3. This concept suggests that companies associated with each
other through the virtue of common control operate as a
single economic unit and therefore the consolidated financial
statements of a group of companies should reflect the essence
of such arrangement.
_______________4. This principle in accounting, also known as realization
concept, refers to the application of accruals concept towards
the recognition of revenue (income).
_______________5. This is an accounting concept which means that transactions
and events must be recorded in the financial statements in
their economic substance rather than just in their legal form, in
order to present the true affairs of the entity.
_______________6. This is one fundamental assumption that financial statements
are prepared on the assumption that a business entity will
continue to operate in the foreseeable future without the need
or intention on the part of management to liquidate the entity
or to significantly curtail its operational activities.
_______________7. This is a principle of accounting where income and expense
must be recognized in the accounting periods to which they
relate or they are incurred.
_______________8. This principle of accounting states that information is material
if its omission or misstatement could influence the economic
decisions of users.
_______________9. This concept means that accounting methods once adopted
must be applied consistently in future; same methods and
techniques must be used for similar situations. Business

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 must refrain from changing its accounting policy unless on
reasonable grounds.
_______________10. Financial statements of one accounting period must be
comparable to another in order for the users to derive
meaningful conclusions about the trends in an entity’s financial
performance and position over time.
_______________11. Information is relevant if it helps users of the financial
statements render right decision at a given time and helps
predict future trends of the business or correct past predictions
that management has made.
_______________12.
This principle requires that expenses incurred by an
organization must be charged to the income statement in
the accounting period in which the revenue, to which those
expenses relate, is earned.

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 TEST MATERIAL 6-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect.

__________ 1. When we say prudence, it requires that accountants should exercise

a degree of caution in making significant estimates on the valuation
of assets and recording of income (not overstated) and expenses (not
understated).

__________ 2. The principles of accounting are also called the characteristics of the
financial statements.

__________ 3. Information is reliable if a user of the information can depend on it to

be accurate and faithfully represented.

__________ 4. Completeness principle means that information contained in the

financial statements must be free from bias.

__________ 5. Matching principle in accounting refers to the need for the accounting
information to be presented to the users in time to fulfill their decision
making needs.

__________ 6. The concept of consistency means that accounting methods once

adopted must be applied consistently in future; same methods and
techniques must be used for similar situations.

__________ 7. In order to present the true affairs of the organization, the transactions
and events must be recorded in the financial statements in their legal
form.

__________ 8. Neutrality should reflect a balanced view of the company’s affairs

without attempting to present them in a favored way.

__________ 9. Misstatements or omissions in financial statements which are

significant in nature reduce the reliability of information contained
in the financial statements.

__________ 10. Revenue recognition principle in accounting is also known as

realization concept.

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 CHAPTER

7
THE ACCOUNTING
EQUATION

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Learn to familiarize the accounting equation;
☞ Illustrate the accounting equation;
☞ Apply the accounting equation to simple business
transactions noting the increases and decreases on
the basic elements of the equation; and
☞ Apply the accounting equation to simple business
transactions affecting the accounts using a tabular
format.

The Accounting Equation is the basic tool of accounting where the left side
of the equation shows the resources owned by the business and the right side of the
equation shows the resources that are applied to the business by the outside creditors
and the owners.

The Accounting Equation is:

ASSETS = LIABILITIES + CAPITAL

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 ACCOUNTS ACCOUNTS ACCOUNTS
Examples of Assets: Examples of Liability: Capital Accounts:

Petty Cash Fund Accounts Paybles Original Capital Investments

Cash On Hand Notes Payable Additional Investments
Cash In Bank SSS Premium Payable Owner’s Withdrawal
Accounts Receivable - Trade Pag-IBIG Payable Revenue/Expenses
Accounts Receivable - Others PhilHealth Payable Gains and Losses
VAT Input VAT Output Payable
Creditable Witholding Taxes Unearned Income
Notes Receivable Customers Deposits
Prepaid Expenses Rentals Deposits
Land Loans Payable
Building
Transportation Equipment
Office Equipment
Computer, Software & Peripherals
Furniture and Fixtures
Leasehold Improvements

Illustration 1: - Effects of Business Transactions in the Accounting Equation

Business Transactions

1. The owner invested cash to an internet business for P200,000.

2. The business purchased internet equipment in cash for P50,000.
3. The business purchased computer printers on account/credit for P10,000.
4. The business purchased supplies in cash for P2,000.
5. The business collected cash from the internet gamers and users for P50,000.
6. The business paid salaries to employees for P10,000.
7. The business paid communication expenses for P20,000.
8. The business paid electricity bills worth P2,000.
9. The owner withdraws cash for P5,000.
10. The business partially paid the payable incurred in the purchase of computer
printers for P5,000.
11. The owner invested additional cash to the business for P100,000.
12. At the end of the month, physical count of supplies shows consumption of
supplies amount to P1,500.

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 Effects of Business Transaction in the Accounting Equation

Accounting Equation:

ASSETS = LIABILITIES + CAPITAL

(left side of the equation) = (right side of the equation)

Transaction 1

• Assets = increase in asset

• Liabilities = no effect
• Capital = increase in capital

Explanation: Cash, which is an ASSET, is added to the equation for P100,000 on

the left side; while the same amount is also added to the equation on the right side, as the
CAPITAL of the owner. Take note that at both sides of the equation, the amounts are equal. No
effect to the liabilities as the transaction does not involve a liability.

Transaction 2

• Assets = increase in one form of asset and decrease in

another form of asset
• Liabilities = no effect
• Capital = no effect

Explanation: The transaction involves two forms of ASSETS – one is the internet
equipment which is added to the equation as an asset and the other one is cash being taken
out from the equation as payment. The effect of the two assets is zero, which still makes the
accounting equation equal.

Transaction 3

• Assets = increase in assets

• Liabilities = increase in liabilities
• Capital = no effect

Explanation: There is an increase in ASSETS which is added on the left side of the
equation in the form of computer printers and at the same time an increase in the LIABILITIES
on the right side of the equation as the asset is purchased on account or on credit.

Transaction 4

• Assets = increase in one form of asset and

decrease in another form of asset

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 • Liabilities = no effect
• Capital = no effect

Explanation: There is an increase in one form of an ASSET which is added on the left
side of the equation in the form of supplies and a decrease in another form of an ASSET which
is deducted on the left side of the equation in the form of cash. The transaction resulted to zero
which make the equation equal.

Transaction 5

• Assets = increase in assets

• Liabilities = no effect
• Capital = increase in capital

Explanation: There is an increase in the ASSETS on the left side of the equation in
the form of cash and increase in CAPITAL on the right side of the equation in the form of
revenues. Please take note that all revenues and income increase the capital of the owner in the
accounting equation.

Transaction 6

• Assets = decrease in assets

• Liabilities = no effect
• Capital = decrease in capital

Explanation: There is a decrease of ASSETS on the left side of the equation in the
form of cash payment and decrease of CAPITAL on the right side of the equation in the form
of salaries as expense incurred by the business. Please take note that all expenses incurred by a
business decrease the capital account of the owner.

Transaction 7

• Assets = decrease in assets

• Liabilities = no effect
• Capital = decrease in capital

Explanation: There is a decrease of ASSETS on the left side of the equation in the
form of cash payment and decrease of CAPITAL on the right side of the equation in the form
of communication expense. All expenses incurred by a business decrease the capital account of
the owner

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 Transaction 8

• Assets = decrease in assets

• Liabilities = no effect
• Capital = decrease in capital

Explanation: There is a decrease of ASSETS on the left side of the equation in the
form of cash payment and decrease of CAPITAL on the right side of the equation in the form
of electricity expense. All expenses incurred by a business decrease the capital account of the
owner

Transaction 9

• Assets = decrease in assets

• Liabilities = no effect
• Capital = decrease in capital

Explanation: There is a decrease of ASSETS on the left side of the equation in the form
of cash payment to the owner and decrease of CAPITAL on the right side of the equation in the
form of cash withdrawal by the owner. Please take not that all withdrawals of assets made by
the owner from the business decrease the capital account of the owner

Transaction 10

• Assets = decrease in asset

• Liabilities = decrease in liabilities
• Capital = no effect

Explanation: There is decrease of ASSETS on the left side of the equation in the form
of cash payment and decrease of LIABILITIES on the right side of the equation in the form of
partial payment to the liability on transaction 3.

Transaction 11

• Assets = increase in assets

• Liabilities = no effect
• Capital = increase in capital

Explanation: There is an increase of ASSETS in the form of cash on the left side of the
equation and increase in CAPITAL on the right side of the equation in the form of additional
capital investment by the owner. All investments made by the owner to the business increase
the capital account of the equation.

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 Transaction 12

• Assets = decrease in assets

• Liabilities = no effect
• Capital = decrease in capital

Explanation: There is a decrease of ASSETS on the left side of the equation in the
form of supplies being used to the business and decrease in CAPITAL on the right side of
the equation in the form of supplies usages. Please take note that all supplies taken from the
inventory and used by the business in the operation will be charged as expense, thus reducing
the capital account of the owner.

Illustration 2:

Using the same transactions in illustration 1, let’s assign the amounts of

the transactions in a tabulated sheet that shows the effects of the amounts in the
accounting equation.

Business Transactions

1. The owner invested cash to an internet business for P200,000.

2. The business purchased internet equipment in cash for P50,000.
3. The business purchased computer printers on account/credit for P10,000.
4. The business purchased supplies in cash for P2,000.
5. The business collected cash from the internet gamers and users for P50,000.
6. The business paid salaries to employees for P10,000.
7. The business paid communication expenses for P20,000.
8. The business paid electricity bills worth P2,000.
9. The owner withdraws cash for P5,000.
10. The business partially paid the payable incurred in the purchase of computer
printers for P5,000.
11. The owner invested additional cash to the business for P100,000.
12. At the end of the month, physical count of supplies shows consumption of
supplies amount to P1,500.

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 Solution:

Transaction (A) (B) (C) Net Effect

No. ASSETS = LIABILITIES + CAPITAL B+C=A
1 200,000.00 200,000.00 both sides equal to P200,000
2 50,000.00 both sides equal to zero (0)
(50,000.00)
3 10,000.00 10,000.00 both sides equal to P10,000
4 2,000.00 both sides equal to zero (0)
(2,000.00)
5 50,000.00 50,000.00 both sides equal to P50,000
6 (10,000.00) (10,000.00) both sides equal to -P10,000
7 (20,000.00) (20,000.00) both sides equal to -P20,000
8 (2,000.00) (2,000.00) both sides equal to -P2,000
9 (5,000.00) (5,000.00) both sides equal to -P5,000
10 (5,000.00) (5,000.00) both sides equal to -P5,000
11 100,000.00 100,000.00 both sides equal to P100,000
12 (1,500.00) (1,500.00) both sides equal to -P1,500

Column Total 316,500.00 5,000.00 311,500.00

Equation Total 316,500.00 316,500.00 both sides equal to P316,500

Illustration 3:

Using the same transactions above, let us assign accounts to the amounts of the
transactions in a tabulated sheet that shows the effects of the amounts and accounts
in the accounting equation.

Business Transactions

1. The owner invested cash to an internet business for P200,000.

2. The business purchased internet equipment in cash for P50,000.
3. The business purchased computer printers on account/credit for P10,000.
4. The business purchased supplies in cash for P2,000.
5. The business collected cash from the internet gamers and users for P50,000.
6. The business paid salaries to employees for P10,000.
7. The business paid communication expenses for P20,000.
8. The business paid electricity bills worth P2,000.
9. The owner withdraws cash for P5,000.
10. The business partially paid the payable incurred in the purchase of computer
printers for P5,000.

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 11. The owner invested additional cash to the business for P100,000.
12. At the end of the month, physical count of supplies shows consumption of
supplies amount to P1,500.

Solution to Illustration 3
Transaction ASSETS (A) LIABILITIES (B) (C)
No. Cash Internet Computer Supplies = Accounts + CAPITAL Account Specification or
Equipment Printers Payable Breakdown for Capital
1 200,000.00 200,000.00 Capital
2 (50,000.00) 50,000.00
3 10,000.00 10,000.00
4 (2,000.00) 2,000.00
5 50,000.00 50,000.00 Service Revenue
6 (10,000.00) (10,000.00) Salaries expense
7 (20,000.00) (20,000.00) Communication expenses
8 (2,000.00) (2,000.00) Light & Water expenses
9 (5,000.00) (5,000.00) Owners drawings
10 (5,000.00) (5,000.00)
11 100,000.00 100,000.00 Capital
12 (1,500.00) (1,500.00) Supplies expenses

Column Total 254,500.00 50,000.00 10,000.00 2,000.00 5,000.00 311,500.00

Equation Total 316,500.00 316,500.00 both sides equal to P315,500

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 TEST MATERIAL 7-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Encircle the letter of the correct answer.

1. Dr. Walican began practicing as a doctor by investing P150,000 cash and

equipment P50,000.

a. Increase in assets = increase in capital

b. Increase in assets = increase in liabilities
c. Increase in liabilities = increase in capital
d. Increase in assets = decrease in another form of asset

2. Purchase furniture and fixtures for P10,000 and supplies for P2,000 on account.

a. Increase in assets = increase in liabilities

b. Increase in one form of asset = decrease in another form of asset
c. Increase in assets = increase in capital
d. None of the above

3. Paid the monthly rental of the clinic for P10,000.

a. Increase in assets = increase in capital

b. Increase in liabilities = increase in assets
c. Decrease in assets = decrease in capital
d. Increase in assets = decrease in capital

4. Collected P5,000 from a patient undergoing surgery.

a. Increase in assets = increase in capital

b. Increase in assets = decrease in capital
c. Decrease in assets = increase in liabilities
d. Increase in one form of asset = decrease in another form of asset

5. Purchase medical equipment from ABC Enterprises on credit for P25,000.

a. Increase in assets = increase in capital

b. Increase in assets = decrease in capital
c. Decrease in asset = increase in liabilities
d. Increase in assets = increase in liabilities

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 6. Paid salary to the staff nurse and secretary for P17,500.

a. Increase in assets = decrease in capital

b. Increase in assets = increase in capital
c. Increase in liabilities = increase in assets
d. Decrease in assets = decrease in capital

7. Performed surgical operation for P50,000 to a patient, A San Diego on credit.

a. Increase in assets = increase in capital

b. Increase in assets = increase in liabilities
c. Increase in liabilities = increase in capital
d. Increase in assets = decrease in another form of asset

8. Paid the amount due to ABC Enterprises for P20,000.

a. Increase in assets = decrease in capital

b. Increase in assets = increase in capital
c. Increase in liabilities = increase in assets
d. Decrease in assets = decrease in liabilities

9. Mr. San Diego paid his account in full.

a. Increase in assets = increase in capital

b. Increase in assets = decrease in liabilities
c. Decrease in assets = increase in liability
d. Increase in one form of asset = decrease in another form of asset

10. The owner withdraws cash from the business for P15,000.

a. Increase in assets = decrease in capital

b. Increase in assets = increase in capital
c. Increase in liabilities = increase in assets
d. Decrease in assets = decrease in capital

11. Performed various check-ups to patients for P5,000.

a. Increase in assets = increase in capital

b. Decrease in assets = increase in liabilities
c. Increase in assets = decrease in capital
d. Increase in assets = decrease in another form of asset

12. Paid monthly telephone bill for P3,000.

a. Increase in assets = increase in capital

b. Decrease in assets = decrease in capital
c. Increase in assets = increase in liabilities
d. Increase in assets = decrease in another form of asset

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 13. Paid in full the amount due to ABC Enterprises.

a. Decrease in assets = decrease in capital

b. Increase in assets = increase in capital
c. Increase in liabilities = increase in assets
d. Decrease in assets = decrease in liabilities

14. Purchased additional medical supples for P3,000.

a. Increase in assets = decrease in another form of asset

b. Increase in assets = increase in capital
c. Decrease in assets = decrease in capital
d. Increase in assets = increase in liabilities

15. Purchased vehicle for P300,000 through a bank loan.

a. Increase in assets = increase in liabilities

b. Increase in assets = decrease in another form of asset
c. Increase in assets = increase in capital
d. Decrease in assets = decrease in capital

16. The owners withdraws cash for P10,000.

a. Increase in assets = decrease in another form of asset

b. Increase in assets = increase in capital
c. Decrease in assets = decrease in capital
d. Increase in assets = increase in liabilities

17. Paid electricity bills for P7,500 in cash.

a. Decrease in assets = decrease in capital

b. Increase in assets = increase in liabilities
c. Increase in assets = decrease in another form of asset
d. Increase in assets = increase in capital

18. Performed check-ups to a patient for P1,000.

a. Decrease in assets = decrease in capital

b. Increase in assets = increase in capital
c. Increase in liabilities = increase in assets
d. Decrease in assets = decrease in liabilities

19. Reimburse gasoline expenses for P1,500.

a. Increase in liabilities = increase in assets

b. Decrease in assets = decrease in liabilities
c. Decrease in assets = decrease in capital
d. Increase in assets = increase in capital

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 20. Recorded used supplies for the month for P2,250.

a. decrease in assets = decrease in another form of asset

b. Increase in assets = increase in capital
c. Decrease in assets = decrease in capital
d. Increase in assets = increase in liabilities

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 TEST MATERIAL 7-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Match column A with column B. Write the letter of the answer to the space
provided.

Column A Column B

________ 1. Owner invested cash for P50,000 A. Increase in assets =

and equipment for P15,000 Increase in capital

________ 2. Paid rent of the office space for B. Increase in assets =

P5,000 Increase in liabilities
C. Decrease in assets =
________ 3. Purchased supplies for P1,500
Decrease in capital
cash
D. Decrease in assets =
________ 4. Provide services to a customer on Decrease in liabilities
credit-P10,000 E. Increase in one asset =
________ 5. Purchased supplies on credit for Decrease in one asset
P3,000
________ 6. Collected cash from Customer –
P10,000
________ 7. Paid the supplies purchased on
credit for P3,000
________ 8. Rendered services for cash P30,000

________ 9. The owner withdraws cash for

P5,000
________ 10. Paid salaries to staff for P10,000

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 TEST MATERIAL 7-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: State the effects of the following transactions on the assets, liabilities and capital
by writing a plus ( + ) sign for the increase and minus ( — ) sign for the decrease.

Transactions Assets Liabilities Capital

Received initial investment from
1.
the owner
2. Purchased supplies on credit
Received cash from the bank as
3.
loan for 2 yrs.
4. Deposited money to the bank
Give cash to the owner as
5.
drawings
6. Sold merchandise for cash
7. Sold merchandise for credit
8. Paid electricity in cash
Purchased merchadise for sale on
9.
credit
Received return merchandise from
10.
customer
Send merchandise for return to
11.
supplier
Collected cash from customer on
12.
account
Paid the debt due to the creditor or
13.
supplier
14. Paid salary of the store helper

15. Purchased computer on account

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 84

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 TEST MATERIAL 7-4
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: State the effects of the following transactions on assets, liabilities and capital.
Write the answers on the answer sheet, as provided for. Enclose in parenthesis if decrease.

Business Transactions as of June 30, 2016 of B. Sumanda Ent:

1. B. Sumanda invested for an IT business in cash. 200,000

2. B. Sumanda invested equipment to the business. 15,000

3. Purchased additional equipment in cash. 30,000

4. Purchased additional equipment on credit. 50,000

5. Borrowed money from bank payable in 1 yr. 50,000

6. Paid for equipment purchased on credit. 50,000

7. B. Sumanda made additional investment in cash. 50,000

8. B. Sumanda makes drawings in cash. 5,000

9. Made partial payment to the bank loan. 5,000

10. Purchase new furniture on credit. 10,000

11. Paid salaries to employees. 20,000

12. Billed customer for services rendered on account. 55,000

13. Paid telephone bills. 5,500

14. Rendered services for cash. 30,000

15. Collected from customers on account. 55,000

16. Paid repairs and maintenance of equipment. 5,000

17. Received rental bill payable next month. 10,000

18. Paid water bill. 3,000

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 Answer Sheet for Test Material 7-4

FABM Revised.indd 86
ASSETS LIABILITIES CAPITAL
Increase Decrease Increase Decrease Increase Decrease

Account Amount Account Amount Account Amount Account Amount Account Amount Account Amount
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
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 TEST MATERIAL 7-5
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: State the effects of the following transactions on assets, liabilities and capital.
Write the amounts on the answer sheet, as provided for. Enclose in parenthesis for the
deductions.

Transactions Amount

1. Owner invested cash to the business. 50,000.00

2. Owner invested equipment to the business. 5,000.00
3. Purchased equipment for cash. 3,000.00
4. Purchased equipment on credit. 6,000.00
5. Borrowed money from the bank. 20,000.00
6. Paid for the equipment purchased on account. 6,000.00
7. Owner invested additional cash to the business. 50,000.00
8. Owner withdraws cash. 10,000.00
9. Purchased supplies for cash. 1,000.00
10. Partially make payment to the bank. 10,000.00
11. Paid salaries of employees. 5,000.00
12. Rendered services to customer on credit. 15,000.00
13. Paid the telephone bill. 1,500.00
14. Rendered services for cash. 20,000.00
15. Collected from customers (item#12). 15,000.00
16. Supplies used during the period. 500.00
17. Interest income earned from deposit. 100.00
18. Incurred repairs for equipment on credit. 2,000.00
19. Received rental bill on credit. 3,000.00

20. Paid repairs incurred on credit (Item#18). 2,000.00

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 Answer Sheet for Test Material 7-5

FABM Revised.indd 88
ASSETS = LIABILITIES + CAPITAL
Accts Loans Accts
Cash Supplies Equipt Capital Account Specification
Receiveable Payable Payable
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
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 TEST MATERIAL 7-6
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: State the effects of the following transactions on assets, liabilities and capital.
Write the amounts on the answer sheet, as provided for. Enclose in parenthesis for the
deductions.

Business Transactions

1. San Diego invested for an IT business in cash. 150,000

2. Purchased computer in cash. 30,000

3. Purchased supplies on account. 5,000

4. Purchased printer on account. 7,500

5. Paid partial to accounts payable on supplies. 3,000

6. Sold payroll program on account. 50,000

7. Did service repairs to computer for cash. 20,000

8. Partial collection of accounts receivable. 25,000

9. Paid electric bill in cash. 3,000

10. Paid rental space for the month. 15,000

11. Paid payable to suppliers on supplies. 2,000

12. Paid salaries to employees. 25,000

13. Paid telephone bills. 5,000

14. Acquire loan from the bank payable in 1 year. 50,000

15. Owner withdraws cash. 10,000

16. Made partial payment to bank loan. 5,000

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FABM Revised.indd 90
Answer Sheet for Test Material 7-6

ASSETS = LIABILITIES + CAPITAL

Accts Office Accts Loans
Cash Supplies Capital Account Specification
Receiveable Equipt Payable Payable
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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 CHAPTER

8
TYPES OF MAJOR
ACCOUNTS

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Discuss the five major accounts;
☞ Know the basic types of accounts, its elements and
their classifications; and
☞ Familiarize the chart of accounts for service and
merchandising business.

MAJOR TYPES OF ACCOUNTS

There are five (5) major or basic types of accounts as components in the
financial statements, namely:

1. Assets
2. Liabilities
3. Capital or Owner’s Equity
4. Revenue or Income
5. Expenses

The accounts in the assets, liabilities and capital (except for the drawings
account) are called real or permanent accounts. This is because these accounts are
carried forward to the next accounting period.

The accounts in the revenues or income and expenses , including the drawing
account, are called nominal or temporary accounts as these are not carried over to
the next accounting period but are closed to the capital account at the end of the
accounting period.

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 Accounts have its normal balances. When we say normal balances, it means
how it will appear when it is summed up in the books of accounts and presented in
the trial balance and financial statements.

There are only two normal balances of an account in the books of accounts - it
is either a DEBIT or it is a CREDIT.

When an account is presented in the trial balance not on its normal balance, it
may have the following reasons that an accountant should correct or make adjusting
entries:

1. there is an unrecorded transaction.

2. there is an error in the entries.
3. there is a transaction or items in the transactions needing reconciliation.
4. a transaction may have been recorded twice.
5. there are errors in the posting process.

The following major types of accounts have its normal balances:

a. Assets – the accounts classified in this type have normal balances of a DEBIT,
except for their contra-assets account like Allowance for Uncollectible
Accounts and Accumulated Depreciation which have normal balances of a
CREDIT but are presented in the asset portion.

A DEBIT entry will increase an asset while a CREDIT entry reduces it. It is the
other way around when it comes to contra-asset accounts that have normal
credit balances.

b. Liabilities – the accounts classified in this type have normal balances of a

CREDIT.

A CREDIT entry will increase a liability while a DEBIT entry will reduce it.

c. Capital – this account is normally a CREDIT while the Drawings Account is

a DEBIT. When the capital account becomes a debit balance, it is termed as
CAPITAL DEFICIT.

A CREDIT entry increases the capital account while a DEBIT entry will reduce
it and a DEBIT entry will increase the drawings account while a CREDIT entry
will reduce it.

d. Revenues/Income – accounts that are classified under this type have normal
balances of a CREDIT.

On merchandising transactions, the SALES account which is classified

under this type is a CREDIT, while the Sales Discounts account is a DEBIT
and the Sales Returns and Allowances account is also a DEBIT. This will be
emphasized in chapter 5.

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 A CREDIT entry increases the revenues/income account while a DEBIT entry
will reduce it.

e. Expenses – all expenses have normal balances of a DEBIT.

On merchandising transactions, the PURCHASE account has a normal DEBIT

balance, while the Purchase Discount account is a CREDIT balance and the
Purchase Returns and Allowances account is also a CREDIT balance.

A DEBIT entry will increase the expenses account while a CREDIT entry
reduces it.

THE ASSETS ACCOUNT

Assets are defined as tangible and intangible items, maybe objects or entities,
that the company owns and have economic value. These assets are also the resources
of the company that bring in revenues or income for the business.

Assets are also grouped according to either their life span/useful life or
liquidity – how quick they can be converted into cash.

Assets can be used to:

1. Settle obligations;
2. Produce goods and services for sale;
3. Barter or exchange with another form of asset;
4. Pay off capital investment in the form of drawings.

Assets are classified as:

1. Current Assets- items that are completely consumed, sold, or converted

into cash within one year or 12 months. These are presented in the trial
balance or balance sheet according to its liquidity- the most liquid comes
first like cash.

Examples are:

a. Cash and its equivalents

b. Accounts Receivable
c. Notes Receivable
d. Merchandise Inventory
e. Supplies Inventory
f. Prepaid expenses

2. Non-Current Assets- are tangible or intangible assets with a life span of

more than one year and usually longer which typically not very liquid.
The purchase costs of assets such as machinery, buildings and other

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 equipment are not expensed out as incurred, but rather depreciated, or
expensed out or “written off,” over a number of years according to its
estimate lifespan or useful life.

Examples are:

a. Land
b. Building
c. Vehicles
d. Office and Computer Equipment
e. Furniture & Fixtures
f. Goodwill, Copyrights, Patents, Franchises

Tangible assets are those assets with physical forms such as land, buildings,
vehicles, equipment, and inventory.

Intangible assets are things that represent money or value; things such as
Accounts Receivables, patents, contracts, and certificates of investments.

Typical assets in its form as tangible or intangible, whether current or non-

current, are as follows:

Tangible Assets

1. Cash – this is the most liquid form of asset in a business organization. This
may represents cash on hand, cash in bank, petty cash fund and revolving
funds. Short-term marketable securities or instruments are also classified as
cash.

2. Merchandise Inventory – these are purchases of various goods or products

intended for sale.

3. Supplies Inventory - these are purchases of various supplies intended for office
or operations use. Once these supplies are put into use for the business, these
are eventually classified as expense.

4. Land, Building, Equipment, Furniture and Vehicles are long-term resources of the
business that serve as support to the day-to-day activities of the business

Intangible Assets

1. Accounts Receivable – these are amounts due from customers who have
purchased goods or services from the seller through sales invoices. This
is common commonly paired with the allowance for doubtful accounts (a
contra-asset account), as reserve for bad debts. The combined balances in the
accounts receivable and allowance accounts represent the net carrying value
of accounts receivable.

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 2. Notes Receivable – this account represents indebtedness of a customer who
purchases goods or services from a seller by way of a promissory note
3. Prepaid Expenses- these are future expenses paid in advance and the amount
that has not yet expired are reported in the company’s balance sheet as an
asset. Examples of this are prepaid insurance, prepaid taxes and prepaid
advertising.
4. Goodwill, Copyrights, Patents, Franchises

LIABILITIES

Liabilities are debts or financial obligations of an individual or company to

other individuals or companies.

The settlement of these debts or obligations is through:

1. Payment in the form of cash.

2. Payment in the form of any asset other than cash.
3. Payment in the form of rendering services.
4. Replacement by another debt or obligation.
5. Conversion of the debt into capital.
6. The creditor may waive his right to collect the existing obligation.

Liabilities are classified as:

1. Current Liabilities – this consists of short-term debts that require payment

in one year or less.

Examples are:

a. Accounts Payable – these are amounts owed by the individual or

company to creditors or suppliers for the purchase of goods and
services
b. Unearned Income – amount received from customer in advance,
either as deposit or down-payment for services that has yet to be
performed by the company
c. Output Vat Payable – this amount represents the tax added to the
sale of goods or services being billed to customers, be it cash or on
account.
d. Withholding Tax Payable – this is a payroll liability in which an
amount is withheld as taxes from the salaries of officers and
employees for remittance to the BIR
e. SSS Payable – the amount of contribution by employees which is
deducted from their salaries, including the employer share for
remittance to the Social Security Services (SSS).

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 f. Pag-IBIG Payable – the amount of contribution by employees which
is deducted from their salaries, including the employer share for
remittance to Pag-ibig Fund
g. PhilHealth Payable – the amount of contribution by employees
which is deducted from their salaries, including employer share for
remittance to Philhealth
h. Salaries or Wages Payable – these are salaries of employees that are
already incurred but only paid on the next payroll cut-off
i. Taxes Payable – these are obligations to the governments subsequently
paid the following period.
j. Accrued Expense Payable – these amounts representing expenses
already incurred during the period but not yet paid.

2. Non-Current Liabilities – these are long-term debts that will be settled or

paid beyond one year

Examples are:

a. Notes Payable – this amount is owed by an individual or company

to creditors or suppliers for goods or services purchased and
is evidenced by a written promissory note to pay the debt in a
specified period normally longer than one year.
b. Loans Payable – this amount owed by an individual or company
to creditors or banks and other financial institutions for amount
borrowed, normally for a longer period of time.

CAPITAL OR OWNER’S EQUITY

Equity represents the value of assets after deducting the total of liabilities from
the total of assets. This is also called the residual value or interest of the owner from
the business. These are contributions of the owner to the business, either in cash or
non-cash assets like equipment, vehicles, furniture, etc..

In a sole-proprietorship business, the capital’s components within the

accounting period are as follows:

Original investment or capital contribution P xxx

Add: Additional investment/contribution xxx
Net income xxx
Total P xxx
Less: Drawings ( xxx)
Net Capital, end P xxx

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 REVENUES OR INCOME

The income or revenue account comprises the actual money earned over a
period of time from a job, sale of goods or products and services, either in cash or on
account.

Examples are:

a. Revenue or income generated from the sale of a commodity or rendering

of services
b. Interests received on a bank deposit
c. Gain on the sale of assets
d. Rental received on a leased property
e. Professional fees earned

EXPENSES

An expense is a cost incurred as part of a company’s operating activities during

a specified accounting period which are necessary in the conduct of the business.

Examples are:

a. the cost of goods sold

b. commissions earned by the sales employees
c. rent for the office space
d. the cost of the electricity used
e. advertising that took place
f. wages and salaries that were incurred
g. Depreciation expenses for the amortization of fixed assets
h. Losses

CHART OF ACCOUNTS

A chart of accounts is a created list of the accounts used by an organization to

define each class of items for which money or the equivalent is spent or received. It is
used to organize the finances of the entity and to segregate assets, liabilities, capital,
revenue and expenditures in order to give interested parties a better understanding
of the financial activities of the business.

Accountants and bookkeepers will refer to the chart of accounts list as

reference for all the transactions that they will record in the books of accounts as a
form of classification.

What is an ACCOUNT in accounting?

It is a record in the general ledger that is used to collect and store debit and
credit amounts from a transaction. To summarize the same transactions into one, a

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 specific account is assigned to it. The accounts used in accounting are commonly and
generally accepted in the accounting practice.

The T-Account is the simplest form of an account because you can summarize
transactions through this without using the general ledger book and can already
prepare a trial balance.

It is literally a broad and very wide letter “T” with the debit on the left side
and the credit on the right side:

Account Title
Debit Credit

A typical example of a chart of accounts for a merchandising business is

illustrated below:

CHART OF ACCOUNTS
Account No. Account Title Description
CURRENT ASSETS
It includes revolving/petty cash
100-01 Cash on Hand fund and undeposited collections
that are still on hand
Bank deposits either savings, time
100-02 Cash in bank
deposits or checking deposits
Amount owed to the company
100-03 Accounts Receivable by the customers through sale of
goods or merchadises
These are reserves or allowance
Allowance for for uncollectible accounts from
100-031
Uncollectible Accounts customers. This a contra-asset ac-
count of Accounts Receivable
Amounts owed to the company by
customers evidenced by a written
promise of customer to pay a cer-
100-04 Notes Receivable tain amount of money a specified
time as payment for goods or mer-
chandised delivered

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 These are cash advances extended
to its employees either for liquida-
100-05 Advances to employees tion of expenses or deduction from
salary
These are good/products that are
100-06 Merchandise Inventory kept in a warehouse for sale or un-
sold items in the store.
Items such as bond paper, folders,
100-07 Office Supplies fasteners, ballpens, envelopes, and
other supplies used in the office
Items such as bond paper, folders,
100-08 Store Supplies fasteners, ballpens, envelopes, and
other supplies used in the stores
Insurance policy premium paid in
100-09 Prepaid Insurance
advance by the company
Taxes, permits and licenses paid in
100-10 Prepaid Taxes
advance to the government
These are advance payment or de-
100-11 Prepaid Advertising posits intended for advertisements
of the company
These are normally rental payments
of office or stores equivalent to 3
100-12 Prepaid Rent or 6 months paid in advance by the
company to the lessor.
NON-CURRENT ASSETS
Items such as aircondtioning unit,
computer and printer, check writer,
101-01 Office Equipment typewriter, laptops, communiica-
tion equipt, electric fan, cash reg-
isters, etc
This is a contra-asset account of the
Accumulated
101-011 office equipment, for the amortiza-
Depreciation-OE
tion of its cost over useful years
Vehicle used to perform delivery of
101-02 Delivery Vehicle goods or merchandises to custom-
ers
This is a contra-asset account of
Accumulated the delivery equipment, for the
101-021
Depreciation-DV amortization of its cost over useful
years
Items such as filing cabinets, office
101-03 Furniture and Fixtures chairs and tables, computer table,
etc
This is a contra-asset account of
Accumulated the furniture & fixtures, for the
101-031 amortization of its cost over useful
Depreciation-F&F
years
101-04 Land Land used in the business

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 101-05 Building Building used in the business
This is a contra-asset account of
Accumulated
101-051 the building, for the amortization
Depreciation-Blsg
of its cost over useful years
Official vehicle used as service car
101-06 Service Vehicle
for officers and employees
This is a contra-asset account of
Accumulated the service vehicle, for the amorti-
101-061
Depreciation-SV zation of its cost over useful years
Deposit made by the company for
the space occupied which can only
101-08 Rental Deposit be withdrawn or reimbursed at the
end of the leased contract
CURRENT LIABILITIES
Amounts owed to suppliers for the
200-01 Accounts Payable
purchase of goods & services
Amount received from customer in
advance either as deposit or down-
200-02 Unearned income payment for goods or mechandises
that has yet to be delivered by the
company
Amount withheld as taxes from
200-03 Withholding Tax Payable salaries of officers and employees
for remittance to the BIR
Amount of contribution by em-
ployees deducted from their salary
200-04 SSS Premium Payable
including employer share for remit-
tance to SSS
Amount of contribution by em-
ployees deducted from their salary
200-05 Philhealth Payable
including employer share for remit-
tance to Philhealth
Amount of contribution by em-
ployees deducted from their salary
200-06 Pag-ibig Payable
including employer share for remit-
tance to Pag-ibig Fund
This amount represents the tax
added to the goods or merchandises
200-07 VAT Payable
being billed to customers , be it
cash or on account.
NON-CURRENT LIABILITIES
Amounts owed by the company to
creditors for items purchased as
evidenced by a written promissory
200-08 Notes Payable
note to pay the debt in a specified
period normally longer than one
year.

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 Amount owed to creditors or banks
and other financial institutions for
200-09 Loans Payable
amount borrowed normally for a
longer period of time
CAPITAL ACCOUNTS
These are contributions of the
owner to the business, either in
300 Capital
cash or non-cash assets like equip-
ment, vehicles, furnitures, etc
These are amounts withdrawn by
301 Drawings
the owner for personal use
REVENUE/INCOME ACCOUNTS
These are amounts earned for the
sale of goods or merchandises to
400-01 SALES
customers, either in cash or on
account.
These represent goods or mer-
Sales Returns & chandises that are returned by
400-02
Allowances customers due to defect or other
reasons
These are discounts extended to
400-03 Sales Discounts customers by either buying in bulk
or being loyal to the business
These are the amount of interest
400-02 Interest Income earned from bank deposits or
other form of investments
These are gain in selling shares
400-03 Gain on Sale of Assets held as investment or gain in selling
equipment, vehicles or furnitures
COST OF SALES ACCOUNT
This account is used for various
500-01 Purchases purchases of goods or merchandis-
es that are intended for sale
This account is used for goods or
Purchase Returns & merchandiises that are returned to
500-02
Allowances the suppliers for various reasons,
like defect
These are discounts extended b the
500-03 Purchase Discounts suppliers by either buying in bulk
or being loyal to the products
This account in an inventoriable
cost, which means that it will be-
come part of the cost of the prod-
500-4 Freight In ucts/goods being purchased. These
are expenses paid in the delivery of
the goods being shouldered by the
buyer

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 EXPENSE ACCOUNTS
600-01 Advertising expense The cost of advertising
These are permits, licenses and
600-02 Taxes and licenses
other taxes paid to the government
This is the rental cost of the space
600-03 Rent expense
occupied by the business
These are insurance cost premium
600-04 Insurance expense paid for equipment, building, furni-
tures and employees
The amount of electricity and wa-
600-05 Light and water expense
ter
The cost of office supplies con-
600-06 Office supplies expense
sumed during the period
Salaries, Wages & The amount of salaries and ben-
600-07
Benefits efits incurred for the period
The amount of gasoline consumed
by officers and employees during
600-08 Gasoline expenses official business travel/trips and
gasoline incurred by delivery trucks
and service vehicles
These are finance cost charged by
Interest expense or
600-09 banks or other financial institutions
Finance costs
or creditors for the loan availments
Representation Cost of entertaining a client in
600-10
expenses relation to business functions
These are expenses incurred for
the repairs and maintenance of
Repairs and
600-11 transportation and other equip-
maintenance
ment and furnitures of the com-
pany
These are the amortization costs of
600-12 Depreciation expense capitalized non-current assets over
the estimated life of the assets
These are telephone, cellfone, in-
Communication ex-
600-13 ternet and other form of commu-
penses
nications incurred by the company
These are fares or transportation
600-14 Transportation expenses
costs incurred by employees
These are expenses incurred by the
Freight Out or Delivery
600-15 seller in the delivery of goods to
Expenses
the customers
This will be used for expenses that
600-16 Miscellaneous expenses cannot be classified in the above
accounts

A typical example of a chart of accounts for a service business is illustrated

below:

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 CHART OF ACCOUNTS
Account No. Account Title Description
CURRENT ASSETS
It includes revolving/petty cash fund
100-01 Cash on Hand and undeposited collections that are
still on hand
Bank deposits either savings, time
100-02 Cash in bank
deposits or checking deposits
Amount owed to the company by the
100-03 Accounts Receivable
customers through sale of services
These are reserves or allowance for
Allowance for Uncollectible uncollectible accounts from customers.
100-031
Accounts This a contra-asset account of Accounts
Receivable
Amounts owed to the company by
customers evidenced by a written
100-04 Notes Receivable promise of customer to pay a certain
amount of money a specified time as
payment for services rendered
These are cash advances extended to
100-05 Advances to employees its employees either for liquidation of
expenses or deduction from salary
Items such as bond paper, folders,
100-06 Office Supplies fasteners, ballpens, envelopes, , and
other supplies used in the office
Insurance policy premium paid in
100-07 Prepaid Insurance
advance by the company
Taxes, permits and licenses paid in
100-08 Prepaid Taxes
advance to the government
These are advance payment or deposits
100-09 Prepaid Advertising intended for advertisements of the
company
These are normally rental payments
100-10 Prepaid Rent equivalent to 3 or 6 months paid in
advance by the company to the lessor.
NON-CURRENT ASSETS
Items such as aircondtioning unit,
101-01 Office Equipment computer and printer, check writer,
typewriter, laptops, communiication
equipt, electric fan, etc
This is a contra-asset account of the
Accumulated Depreciation-
101-011 office equipment, for the amortization
OE
of its cost over useful years
Items used in rendering services related
101-02 Service Equipment
to the generation of revenues

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 Accumulated Depreciation- This is a contra-asset account of the
101-021
SV service equipment, for the amortization
of its cost over useful years
Vehicle used to perform delivery of
101-03 Delivery Vehicle
services to customers

Accumulated Depreciation- This is a contra-asset account of the

101-031
DV delivery equipment, for the amortization
of its cost over useful years
Items such as filing cabinets, office
101-04 Furniture and Fixtures
chairs and tables, computer table, etc
This is a contra-asset account of the
Accumulated Depreciation-
101-041 furniture & fixtures, for the amortization
F&F
of its cost over useful years
101-05 Land Land used in the business
101-06 Building Building used in the business
This is a contra-asset account of the
Accumulated Depreciation-
101-061 building, for the amortization of its cost
Blsg
over useful years
Official vehicle used as service car for
101-07 Service Vehicle
officers and employees
This is a contra-asset account of the
Accumulated Depreciation-
101-071 service vehicle, for the amortization of
SV
its cost over useful years
Deposit made by the company for
101-08 Rental Deposit the space occupied which can only be
withdrawn or reimbursed at the end of
the leased contract
CURRENT LIABILITIES
Amounts owed to suppliers for the
200-01 Accounts Payable
purchase of goods & services
Amount received from customer in ad-
200-02 Unearned income vance either as deposit or downpay-
ment for services that has yet to be per-
formed by the company
Amount withheld as taxes from salaries
200-03 Withholding Tax Payable of officers and employees for remittance
to the BIR
Amount of contribution by employees
200-04 SSS Premium Payable deducted from their salary including
employer share for remittance to SSS
Amount of contribution by employees
200-05 Philhealth Payable deducted from their salary including
employer share for remittance to
Philhealth

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 Amount of contribution by employees
200-06 Pag-ibig Payable deducted from their salary including
employer share for remittance to Pag-
ibig Fund
This amount represents the tax added
200-07 VAT Payable to the service revenues being billed to
customers for services rendered, be it
cash or on account.
NON-CURRENT LIABILITIES
Amounts owed by the company to
creditors for items purchased as
200-08 Notes Payable evidenced by a written promissory note
to pay the debt in a specified period
normally longer than one year.
Amount owed to creditors or banks and
200-09 Loans Payable other financial institutions for amount
borrowed normally for a longer period
of time
CAPITAL ACCOUNTS
These are contributions of the owner
300 Capital to the business, either in cash or non-
cash assets like equipment, vehicles,
furnitures, etc
These are amounts withdrawn by the
301 Drawings
owner for personal use
REVENUE/INCOME ACCOUNTS
These are amounts earned by perform-
400-01 Service Revenue ing or delivering of services to custom-
ers, either in cash or on account.
These are the anount of interest earned
400-02 Interest Income from bank deposits or other form of
investments
These are gain in selling shares held as
400-03 Gain on Sale of Assets investment or gain in selling equipment,
vehicles or furnitures
EXPENSE ACCOUNTS
500-01 Advertising expense The cost of advertising
These are permits, licenses and other
500-02 Taxes and licenses
taxes paid to the government
This is the rental cost of the space
500-03 Rent expense
occupied by the business
These are insurance cost premium paid
500-04 Insurance expense for equipment, building, furnitures and
employees
500-05 Light and water expense The amount of electricity and water
The cost of office supplies consumed
500-06 Office supplies expense
during the period

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 The amount of salaries and benefits
500-07 Salaries, Wages & Benefits
incurred for the period
The amount of gasoline consumed by
officers and employees during official
500-08 Gasoline expenses business travel/trips and gasoline in-
curred by delivery trucks and service
vehicles
These are finance cost charged by
Interest expense or Finance
500-09 banks or other financial institutions or
costs
creditors for the loan availments
Cost of entertaining a client in relation
500-10 Representation expenses
to business functions
These are expenses incurred for the re-
500-11 Repairs and maintenance pairs and maintenance of transportation
and other equipment and furnitures of
the company
These are the amortization costs of
500-12 Depreciation expense capitalized non-current assets over the
estimated life of the assets
These are telephone, cellfone, internet
500-13 Communication expenses and other form of communications
incurred by the company
These are fares or transportation costs
500-14 Transportation expenses
incurred by employees
This will be used for expenses that can-
500-15 Miscellaneous expenses
not be classified in the above accounts

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 TEST MATERIAL 8-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Identify the following by checking the appropriate column whether asset, liability,
capital, revenue or expense account.

Asset Liability Capital Revenue Expense

1. Capital ______ ______ ______ ______ ______

2. Service Revenue ______ ______ ______ ______ ______

3. Prepaid rent expense ______ ______ ______ ______ ______

4. Cash ______ ______ ______ ______ ______

5. Notes payable ______ ______ ______ ______ ______

6. Franchises ______ ______ ______ ______ ______

7. Rental Income ______ ______ ______ ______ ______

8. Purchase discounts ______ ______ ______ ______ ______

9. Sales returns & allow ______ ______ ______ ______ ______

10. Accumulated depreciation ______ ______ ______ ______ ______

11. Accrued expense ______ ______ ______ ______ ______

12. Freight out ______ ______ ______ ______ ______

13. Owner’s drawings ______ ______ ______ ______ ______

14. Unused Supplies ______ ______ ______ ______ ______

15. Interest income ______ ______ ______ ______ ______

16. Merchandise Inventory ______ ______ ______ ______ ______

17. Interest expense ______ ______ ______ ______ ______

18. Cash in bank ______ ______ ______ ______ ______

19. Prepaid insurance ______ ______ ______ ______ ______

20. Taxes & licenses ______ ______ ______ ______ ______

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 TEST MATERIAL 8-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: State whether each of the following is an ASSET, LIABILITY or CAPITAL. If

asset or liability, state the kind whether CURRENT or NON-CURRENT.

Example: Cash Asset Current

Loans Payable Liability Non-current

1. Accrued expense payable ____________ ____________

2. Unused supplies ____________ ____________

3. Prepaid insurance ____________ ____________

4. Furniture & fixtures ____________ ____________

5. Goodwill ____________ ____________

6. Building ____________ ____________

7. Accounts receivable ____________ ____________

8. Unearned income ____________ ____________

9. Notes payable ____________ ____________

10. Owner’s drawings ____________ ____________

11. Accounts payable ____________ ____________

12. Merchandise inventory ____________ ____________

13. Patents ____________ ____________

14. Salaries payable ____________ ____________

15. VAT payable ____________ ____________

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 TEST MATERIAL 8-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Check in the space provided whether the asset listed below is TANGIBLE or
INTANGIBLE.

Tangible Intangible

1. Accounts Receivable ____________ ____________

2. Prepaid Rent ____________ ____________

3. Supplies Inventory ____________ ____________

4. Copyrights ____________ ____________

5. Goodwill ____________ ____________

6. Furniture & Fixture ____________ ____________

7. Notes Receivable ____________ ____________

8. Patents ____________ ____________

9. Vehicles ____________ ____________

10. Cash in Bank ____________ ____________

11. Office Equipment ____________ ____________

12. Merchandise Inventory ____________ ____________

13. Franchises ____________ ____________

14. Merchandise Inventory ____________ ____________

15. Cash on Hand ____________ ____________

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 TEST MATERIAL 8-4
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Check in the space provided whether the normal balance of the account listed
below is a DEBIT or a CREDIT.

Debit Credit

1. Unearned Income ____________ ____________

2. Owner’s Drawings ____________ ____________
3. Used Supplies ____________ ____________
4. Notes Payable ____________ ____________
5. Patents ____________ ____________
6. Rent Expense ____________ ____________
7. Accumulated Depreciation ____________ ____________
8. Petty Cash fund ____________ ____________
9. Interest Income ____________ ____________
10. Uncollectible Accounts Expense ____________ ____________
11. Salaries Payable ____________ ____________
12. Service Revenues ____________ ____________
13. Salaries and Wages Expense ____________ ____________
14. Accrued Expenses ____________ ____________
15. Sales Discounts ____________ ____________
16. Purchases ____________ ____________
17. Purchase Returns ____________ ____________
18. Gain on sale of assets ____________ ____________
19. Prepaid Advertising ____________ ____________

20. Insurance Expense ____________ ____________

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 TEST MATERIAL 8-5
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Check in the space provided whether the account listed below is REAL or
NOMINAL account.

Real Nominal

1. Gain on sale of assets ____________ ____________

2. Unearned Income ____________ ____________
3. Merchandise Inventory ____________ ____________
4. Pag-IBIG Payable ____________ ____________
5. Patents ____________ ____________
6. Accounts Receivable ____________ ____________
7. Owner’s Capital ____________ ____________
8. Owner’s Drawings ____________ ____________
9. Cash on Hand ____________ ____________
10. Repairs & Maintenance ____________ ____________
11. Loans Payable ____________ ____________
12. Accumulated Depreciation ____________ ____________
13. Interest Expense ____________ ____________
14. Accrued Expenses ____________ ____________
15. Sales Returns ____________ ____________
16. Sales ____________ ____________
17. Unused Supplies ____________ ____________
18. Purchase Discounts ____________ ____________
19. Prepaid insurance ____________ ____________

20. Unearned Income ____________ ____________

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 CHAPTER

9
THE BOOKS OF
ACCOUNTING

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Identify the uses of the two books of accounts;
☞ Illustrate the format of the general and special
journals;
☞ Illustrate the format of the general and subsidiary
ledgers; and
☞ Learn to record and post simple business transactions
to different types of books of accounts.

THE BOOKS OF ACCOUNTS

The Books of Accounts are used to record events transpiring in the course of
the business. These events or transactions are inflows and outflows of monetary
activities that a business normally does in its day-to-day operations. These events are
then summarized, analyzed and converted into financial reports termed as financial
statements.

These books of accounts are registered with the Bureau of Internal Revenue
(BIR) for compliance and monitoring purposes.

There are two major types of books of accounts, namely: (1) journal, and (2)
ledger

Journalizing is the process of recording the business transactions to the general

journal, and posting is the process of transferring or summarizing the transactions
from the general journal to the general ledger.

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 Journal – the journal is referred to as the book of original entry. It records
business transaction in chronological order or order of date using the principle of
“debit and credit”.

In recording the business transactions to a journal, the bookkeeper or

accountant will use the Journal Entry. This journal entry will also include a short
explanation on the nature of the transaction.

When a transaction has one debit and one credit, it is called simple journal entry.
When a transaction has one debit and two or more credits or two or more debits and
one credit or two or more debits and two or more credits, it is called compound journal
entry.

A double entry accounting is a method of accounting that involves recording

of transactions wherein two accounts are affected, one is debited and the other is
credited. This method maintains the accounting equation that both sides of the
equation remain equal.

Example of a simple journal entry is:

Debit Credit
Cash 100,000
Capital – B. Abarquez 100,000
To record initial capital contribution
of B. Abarquez to the business

Example of a compound journal entry is:

Debit Credit
Cash 11,200
Accounts Receivable 44,800
Vat Output Payable 6,000
Service Revenue 50,000
To record professional services to
customer with cash downpayment and
balance 7 days term

In the above examples take note that when you write the credit entry, it should
be indented to the right few spaces from the debit entry; while the short explanation
of the transaction is also indented to the right few spaces from the credit entry.

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 There are the two types of journal: (1). Special Journal, (2). General Journal

1. Special Journals – these are designed to simplify the process of classification

and summarization of accounts from transactions.

a. Sales journal – this is a special journal that is used to record sales of goods
or services on credit (which are receivables from customers).
b. Purchase journal – this is a special journal that is used to record all
purchase transactions which are on credit (payable to suppliers).
c. Cash disbursement journal – this is a special journal that is used to record
cash payment of expenses and payables.
d. Cash receipts journal – this is a special journal that is used to record
cash sales of goods or services and cash collections of receivables from
customers.
2. General Journal – this journal is used to record transactions using the Journal
Voucher System that cannot be recorded in the special journals.

Ledger - is a book of financial accounts that reflects the financial effects of the
business organization’s transactions after they are posted or recorded to the various
journals. This is also called the book of final entry.

While journals show the chronological effect of business activity, ledgers show
activity by account type.

Two basic types of ledgers:

a. General ledger- this summarizes the activity for each of the organization’s
accounts from the journals. This is the book where the entries from various
journals are being posted.
b. Subsidiary ledgers- these are details of various accounts like accounts
receivable and accounts payable that are kept separately to provide better
control of accounts in the general ledger that need extensive monitoring.
These are records that breaks-down the total amount reflected in the
general ledger into parts; per customer for the accounts receivable and per
supplier for the accounts payable.

A service business keeps the following books of accounts:

1. General journal
2. General ledger
3. Cash receipt journal
4. Cash disbursement journal

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 A merchandising business keeps the following books of accounts:

1. General journal
2. General ledger
3. Cash receipt journal
4. Cash disbursement journal
5. Sales journal
6. Purchase journal

Basic Format of Books of Accounts

General Journal

The format used for the various journals takes from the basic format of a
general journal, which has two columns. In actual practice, it is up for the bookkeeper
or accountant to revise the format into several columns when it suits their needs.

Date. The first entry will require the month, date and the year. On succeeding entries,
only the month and date is written.

COMPANY'S NAME: Page No.

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

Account Title & Explanation. The first line to be written is the account debited and
the second line, which is indented to the right, is the account credited. The third line
which is also indented to the right from the account credited will be brief explanation
of the nature of the transaction.

Posting Reference (PR). This is filled up when the account entry is posted or
transferred to the general ledger. What is written here is normally the account number

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 that is assigned to the specific account in the general ledger as listed in the chart of
accounts. Let’s say if a CASH entry on page 1 of this general journal will be posted
to the general ledger and the CASH has an assigned account number in the chart of
accounts as 100-01, then what is written here next to the cash entry is PR is 100-01.

Debit. This is the column where the amount of the account being debited is written.

Credit. This is the column where the amount of the account being credited is written.

General Ledger

There are two types of general ledger format that are being used: (1) a two-
column general ledger and, (2) a three-column general ledger.

Format of a two-column general ledger:

COMPANY'S NAME: GENERAL LEDGER

Account Title: Account No.

DATE EXPLANATION PR DEBIT DATE EXPLANATION PR CREDIT

Format of a three-column general ledger:

COMPANY'S NAME: GENERAL LEDGER

Account Title: Account No.

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Date. What is written here is the date of the journal entry.

Explanation. You can write here a brief description of the account being posted.

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 Post Reference (PR). This is filled up by the page number where the account entry in
the general journal is recorded. Let us say if a CASH entry that is recorded on Page 1
of the general journal will be posted in this ledger and the general ledger is for Cash,
then GJ1 is written.

Debit. Write in this column the debit amount from the general journal.

Credit. Write in this column the credit amount from the general journal.

Balance. This is the difference between the debit transactions and the credit
transactions.

Format of a subsidiary ledger:

SUBSIDIARY LEDGER
SUBISDIARY LEDGER
NAME: Account Title:

DATE Particulars Ref No. DEBIT CREDIT BALANCE

Date. This is the date of the transaction

Particulars. The details of the transactions

Reference No. The source document or accountable document being used in the
transaction. This source documents and accountable documents will be discussed in
the next chapter.

Debit. The amount of the transaction being debited.

Credit. The amount of the transaction being credited

Balance. The difference between the debit transactions and the credit transactions.

In succeeding chapters, the two-column general journal and the three-column

general ledger will be used in recording and posting of the business transactions.

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 Illustration 4.

Below are business transactions of an Accounts Receivable and their effect

to the books of accounts:

2016

June 1 – XYZ Merchandising sold computer equipment for P50,000 to Mr. Perez,
P25,000 cash and the balance on credit per Inv# 1005

June 5- The company sold printers to ABC Company for P10,000 on credit per Inv# 1006

June 10- The company partially collected from Mr. Perez P10,000 per OR#125

Step 1. Recording of business transactions to the general journal

Company Name:XYZ MERCHNADISING COMPANY Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
June 1 Cash 100-01 25 0 0 0
Accounts Receivable 100-03 25 0 0 0
Sales 400-01 500 0 0
To record sale of computer equipt
to Mr. Peres

June 5 Accounts Receivable 100-03 10 0 0 0

Sales 400-01 100 0 0
To record sale of printers to
ABC Company on credit

June 10 Cash 100-01 10 0 0 0

Accounts Receivable 100-03 100 0 0
To record partial collectioh from
the account of Mr. Perez

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 Step 2. Posting of journal entries from the general journal to the general ledger.

COMPANY'S NAME: XYZ COMPANY GENERAL LEDGER

Account Title: CASH Account No. 100-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
June 1 Sale to Mr. Perez GJ 1 25000
10 Collection from Mr. Perez GJ 1 10000 35000

Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
June 1 Sale to Mr. Perez GJ 1 25000
5 Sale to ABC Company GJ 1 10000 35000
10 Collection from Mr. Perez GJ 1 10000 25000

Account Title: SALES Account No. 400-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
June 1 Sale to Mr. Perez GJ 1 50000
5 Sale to ABC Company GJ 1 10000 60000

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 Step 3. Posting of receivable entries to the subsidiary ledgers

SUBSIDIARY
SUBISDIARY LEDGER
LEDGER
NAME: Mr. PEREZ Account Title: Accounts Receivable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

2016
June 1 Sale of Computers Inv1005 25000
10 Payment of account OR125 10000 15000

NAME: ABC COMPANY Account Title: Accounts Receivable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

2015
June 5 Sale of printers Inv1006 10000 10000

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 126

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 TEST MATERIAL 9-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Identify the following.

_________________________ 1. It is the process of recording the business

transactions to the general journal.and posting
is the process of transferring or summarizing
the transactions from the general journal to the
general ledger.
_________________________ 2. It is the book of original entry.

_________________________ 3. It is the process of transferring or summarizing

the transactions from the general journal to the
general ledger.
_________________________ 4. It is the book of final entry.

_________________________ 5. These are used as a means to record events that

transpired in the course of the business.
_________________________ 6. This is a method of accounting that involves
recording of transactions wherein two accounts are
affected, one is debited and the other is credited.
_________________________ 7. These are journals that are designed to simplify
the process of classification and summarization of
accounts from the transactions.
_________________________ 8. This is a special journal that is used to record cash
sales of goods or services and cash collections of
receivables from customers.
_________________________ 9. This the system used to record transactions to
the general journal that cannot be recorded in the
special journals.
_________________________ 10. These are details of various accounts like accounts
receivable and accounts payable that are kept
separately to provide better control of accounts
in the general ledger which need extensive
monitoring.

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 TEST MATERIAL 9-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Journalize the following transactions in a general journal.

Business Transactions as of June 30, 2016 of B. Sumanda Ent:

Transaction Amount

1. B. Sumanda invested for an IT business in cash 200,000

2. B. Sumanda invested equipment to the business 15,000

3. Purchased additional equipment in cash 30,000

4. Purchased additional equipment on credit 50,000

5. Borrowed money from bank payable in 1 yr 50,000

6. Paid for equipment purchased on credit 50,000

7. B. Sumanda made additional investment in cash 50,000

8. B. Sumanda makes drawings in cash 5,000

9. Made partial payment to the bank loan 5,000

10. Purchase new furniture on credit 10,000

11. Paid salaries to employees 20,000

12. Billed customer for services rendered on account 55,000

13. Paid telephone bills 5,500

14. Rendered services for cash 30,000

15. Collected from customers on account 55,000

16. Paid repairs and maintenance of equipment 5,000

17. Received rental bill payable next month 10,000

18. Paid water bill 3,000

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 Answer Sheet for Test Material 9-2

Company NAME: Page No.

COMPANYName: Page No. 0 1

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 COMPANY
CompanyNAME: Page
Name: PageNo.No. 01
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 Company NAME: Page No.
COMPANYName: Page No. 0 1

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 TEST MATERIAL 9-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Journalize the following transactions in a general journal.

Transactions Amount

1. Owner invested cash to the business 50,000.00

2. Owner invested equipment to the business 5,000.00
3. Purchased equipment for cash 3,000.00
4. Purchased equipment on credit 6,000.00
5. Borrowed money from the bank 20,000.00
6. Paid for the equipment purchased on account 6,000.00
7. Owner invested additional cash to the business 50,000.00
8. Owner withdraws cash 10,000.00
9. Purchased supplies for cash 1,000.00
10. Partially make payment to the bank 10,000.00
11. Paid salaries of employees 5,000.00
12. Rendered services to customer on credit 15,000.00
13. Paid the telephone bill 1,500.00
14. Rendered services for cash 20,000.00
15. Collected from customers (item#12) 15,000.00
16. Supplies used during the period 500.00
17. Interest income earned from deposit 100.00
18. Incurred repairs for equipment on credit 2,000.00
19. Received rental bill on credit 3,000.00

20. Paid repairs incurred on credit (Item#18) 2,000.00

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 Answer Sheet for Test Material 9-3

Company NAME: Page No.

COMPANYName: Page No. 0 1

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 COMPANY
CompanyNAME: Page
Name: PageNo.No. 01
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 TEST MATERIAL 9-4
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Journalize the following transactions in a general journal.

Business Transactions Amount

1. San Diego invested for an IT business in cash 150,000

2. Purchased computer in cash 30,000

3. Purchased supplies on account 5,000

4. Purchased printer on account 7,500

5. Paid partial to accounts payable on supplies 3,000

6. Sold payroll program on account 50,000

7. Did service repairs to computer for cash 20,000

8. Partial collection of accounts receivable 25,000

9. Paid electric bill in cash 3,000

10. Paid rental space for the month 15,000

11. Paid payable to suppliers on supplies 2,000

12. Paid salaries to employees 25,000

13. Paid telephone bills 5,000

14. Acquire loan from the bank payable in 1 year 50,000

15. Owner withdraws cash 10,000

16. Made partial payment to bank loan 5,000

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 Answer Sheet for Test Material 9-4

Company NAME: Page No.

COMPANYName: Page No. 0 1

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 COMPANY
CompanyNAME: Page
Name: PageNo.No. 01
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 CHAPTER

10
THE CYCLE OF
ACCOUNTING

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Describe the nature of business transaction and give
examples;
☞ Identify the different types of source and
accountable documents that form part in a business
transaction;
☞ Learn the rules of debits and credits and apply this in
the recording of business transactions;
☞ Know the accounting process and apply this to
simple business transactions and in the preparation of
financial reports;
☞ Know the accounting period;
☞ Learn how to analyze and correct errors from the
recorded transactions;
☞ Prepare appropriate adjusting entries; and
☞ Be able to familiarize the structure and components of
the financial statements.

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 The Business Transactions

Business transactions refer to activities and events that affect the financial
position of a business. These transactions have monetary values which are recorded
in the books of accounts and summarized in financial reports. These are economic
activities in business that involves money or event that has value.

Characteristics of Business Transactions

A business transaction must have the following characteristics:

1. It must have financial value;

2. It must be supported by a source document (e.g. sales invoice, official
receipt, cash or journal voucher, etc.); and
3. It must have effect in the accounting equation.

A business transaction can either be an exchange transaction (involves

physical exchange of values such as sale, purchase, payment, etc.) or a non-exchange
transaction (does not involve physical exchange ,e.g. inventory losses, fire loss,
depreciation, etc.).

Nature of Business Transactions

A transaction can be: (1) an exchange of assets or services for another form
of assets or services, (2) a promise to pay (obligation) between a business and one
or more external parties to a business, (3) a measurable internal event such as the
use of assets in operations. Only economic events resulting from past transactions are
recorded on the books of accounts.

Transactions can either be external (which are usually business transactions or

internal (which are the non-business transactions).

External transactions may include the economic exchanges by the company

with external parties, like the sale of goods or services, borrowing of cash from banks
and financial institutions, purchase of goods and services, etc..

Internal transactions may include the recording of inventory losses,

depreciation of assets, amortization of prepaid expenses, bank reconciliation and
other reconciliation activities that may result to adjustment and recording of entries
in the books.

Business transactions are results of past events. These are evidenced by

source documents, which are financial transactions that come from internal or external
sources.

The source document can be an accountable form or an attachment to the

accountable form. The source document and/or accountable form will be the basis of
the accountant to record the transactions in the books of accounts.

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 Accountable form is pre-numbered and normally a custom-designed form
which the business organization uses internally or externally for its business
transactions.

The accountable forms are particular types of forms that require safeguarding
due to their potential value or negotiability. As the name suggests, accountable forms
need to be individually identified and accounted for. Two examples of these forms
are the sales invoices and official receipts.

These are some Types of Source Documents:

As basis for recording of payments

a. Suppliers invoice and delivery receipt – these are documents submitted by the
supplier for acknowledgment of the company as proof of delivery of goods or
services.
b. Suppliers debit or credit memo – as basis for adjustment like discounts, additional
charges, change in price, etc..
c. Bank checks and withdrawal slips- the bank checks are either used to pay for
purchases of goods and services or to withdraw funds from the bank. Just like
the check, the withdrawal slip is used in the withdrawal funds from the bank.
d. Payroll summary – this contains salaries, wages and allowances of employees
including deducted contributions for remittance to government agencies.

As basis to record revenues

a. Sales invoice – this is also an accountable document that serves as proof for the
sale of goods to customers.
b. Delivery receipt- this is also an accountable document that accompanies the
sales invoice in the delivery of goods to customers.
c. Billing invoice- this is also an accountable document that serves as proof for the
sale of services to customers.

As basis to record cash receipts

a. Official receipt – this is also an accountable document that is issued to customer

upon acceptance of payment for the sale of goods and services, or for the
collection of receivables.
b. Deposit slip – this document serves as proof for the deposit of cash to the bank.
c. Customers’ debit or credit memo- as basis for adjustment of sales like discounts,
change in price, etc..

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 As basis for adjustment and reconciliation

a. Bank statement – this is a source for items reflected by the bank and not
recorded in the organization’s books.
b. Statement of Accounts – this document may be coming from a supplier or
customer reflecting its records for reconciliation with the organization’s own
records.

Business organizations also design forms for their internal use. The purpose
of which is to strengthen monitoring and control of business transactions within their
organization. These forms are normally pre-numbered to safeguard the forms from
potential misuse.

The following are common Accountable Forms used by business organizations

(that should be pre-numbered for control & monitoring):

a. Purchase Order – this is recorded in the purchase book and triggers the creation
of the accounts payable.
b. Sales Invoice (for merchandising & manufacturing companies) or Billing
invoice (for service companies ) which will be recorded in the sales book after
consummation of sales.
c. Delivery Receipt – to support the sale of goods and acknowledge by the
customers.
d. Official Receipt – issued as proof of receipt of cash and to be recorded in the
receipt journal.
e. Provisional Receipt- to be issued temporarily for check payments subject to
check clearing.
f. Check or Cash Voucher – document that is prepared to support any form
of expenditures whether through check or cash payment and recorded in
disbursement journal.
g. Debit Memo – for anything to be charged by the organization to an employee,
supplier or customer.
h. Credit Memo- this will be issued to customers to reduce the receivable for any
discounts or corrections.

THE DEBIT AND CREDIT OF ACCOUNTING

In recording the business transactions, the double entry accounting method is

used wherein it involves two accounts, one is debited and the other is credited. In this
way both sides of the accounting equation remain equal.

Under the double-entry system every business transaction is recorded in at

least two accounts. One account will receive a “debit” entry, meaning the amount

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 will be entered on the left side of that account. Another account will receive a “credit”
entry, meaning the amount will be entered on the right side of that account. The initial
challenge with double-entry is to know which account should be debited and which
account should be credited.

This is why we have the rules of debit and credit to guide accountants and
bookkeepers in the double-entry system.

Rules of debit and credit

1. Asset accounts:
Normal balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit
side of all asset accounts.

2. Liability accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side and a decrease is recorded on the debit
side of all liability accounts.

3. Capital/Equity accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side and a decrease is recorded on the debit
side of all equity accounts.

4. Drawing account:
Normal Balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit
side of all asset accounts.

5. Revenue/Income accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side and a decrease is recorded on the debit
side of all revenue accounts.

6. Expense accounts:
Normal balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit
side of all expense accounts.

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 7. Contra accounts:
Normal balance: Opposite to the normal account.
An example: Accounts receivable is an asset account that normally has a
debit balance. The allowance for uncollectible accounts is a contra account to the
accounts receivable and normally has a credit (opposite) balance.

Rule: If the normal balance of the contra account is debit, the increase will be recorded
on the debit side and the decrease will be recorded on the credit side. If the normal balance
of the contra account is credit, the increase is recorded on the credit side and the decrease is
recorded on the debit side.

The Rules of Debit and Credit are shown in a table below:

Normal
Account Type In Case of Increase In Case of Decrease
Balance
Asset Debit Debit Credit
Expense Debit Debit Credit
Liability Credit Credit Debit

Revenue/Income Credit Credit Debit

Capital/Equity Credit Credit Debit
Drawings Debit Debit Credit
Debit, if normal
Credit, if normal balance
balance of contra
Opposite of contra account is credit
account is credit
Contra Accounts to normal
account Credit, if normal
Debit, if normal balance
balance of contra
of contra account is debit
account is debit

The debit and credit can be associated in simple terms as “value received” for
the debit and “value parted with” for the credit.

Let’s do this in a simple business transaction which is an internet business.

Consider yourself as a bookkeeper or accountant of the business.

Illustration 5

1. The owner invested cash to an internet business.

2. The business purchased internet equipment in cash.
3. The business purchased computer printers on account/credit.
4. The business purchased supplies in cash.
5. The business collected cash from the internet gamers and users.

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 6. The business paid salaries to employees.
7. The business paid telephone expenses.
8. The business paid electricity bills.
9. The owner withdraws cash.
10. The business paid the payable incurred in the purchase of computer printers.

Solution

Transaction No. Value Received Value Parted With

1 Money Payable to owner

2 Internet equipment Money
3 Computer printers Payable to supplier

4 Supplies Money

5 Money Service fee from gamers

6 Employees services Money

7 Telephone bills Money

8 Electricity bills Money
9 Payment of payable to owner Money
10 Payment of payable to supplier Money

Let’s use the the above transactions on debit and credit using the chart of
accounts for service company on Chapter 3:

Transaction No. DEBIT CREDIT

1 Cash Capital
2 Office equipment Cash
3 Office equipment Accounts payable

4 Supplies Cash

5 Cash Service revenue
6 Salaries, wages & benefits Cash

7 Communication expenses Cash

8 Light and water Cash

9 Drawings Cash

10 Accounts payable Cash

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 THE ACCOUNTING CYLE OR ACCOUNTING PROCESS

The accounting process or the accounting cycle is an entire process that an

accountant should accomplish to come up with useful reports for the internal and
external users.

The following is the complete process:

STEP 1- Analyzing business transactions or source documents

The source documents are documents being created at the beginning of the
transaction that provide evidence or proof of an economic event and may be used to
initiate recording into the journals

STEP 2 – Make Journal entries

The accountable forms and source documents will now be recorded in different
accounting journals. These accounting journals are where business transactions make
their first entry in the transaction process.

STEP 3 – Post to ledger accounts

All transactions being recorded in the journals will now be transferred to the
general ledger to summarize the accounts, per account type. A total for each account
will be done on specific period of report. This is called “FOOTING”.

Simultaneously, these transactions will also be posted to the subsidiary

ledgers per account details- per customer, per supplier, per payee or depending on
how you wanted a particular account type be monitored.

STEP 4 – Prepare the trial balance

The trial balance is the list of all accounts with their balances that are lifted
from the general ledger. It is prepared to “prove the equality of debits and credits”.

The trial balance is listed in this order:

1. - Assets (arranged according to their liquidity)

2. - Liabilities
3. - Capital
4. - Drawing
5. - Revenue
6. - Expenses

STEP 5 – Make adjusting entries

This is done to correct errors and to record unrecorded transactions

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 STEP 6- Prepare adjusted trial balance

This report is prepared after the adjusting entries are posted in the worksheet

STEP 7 – Prepare financial statements

The following are the financial statements that will be prepared from the
adjusted trial balance:

1). Statement of Financial Position

2). Statement of Income
3). Statement of Cash Flows
4). Statement of Changes in Capital
5). Notes to the Financial Statements & Capital Letters

STEP 8 – Close accounts

The accounts that will be closed and will not be carried over to the next
accounting period are:

- Revenues
- Expenses
- Owners drawings

The above are called nominal or temporary accounts which will be closed to
the capital account.

STEP 9 – Prepare post-closing trial balance

The contents of the post-closing trial balance are the balance sheet accounts or
called real or permanent accounts which will be carried over to the next accounting
period.

STEP 10 – Interpret financial information

This is the last phase of the accounting process. All contents in the financial
statements will now be interpreted using horizontal or vertical analysis, or using
the financial ratios. These interpretations will be very useful in making economic
decisions.

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 The following is The Accounting Cycle:

Figure 1. The Accounting Cycle

JOURNALIZING AND POSTING OF BUSINESS TRANSACTIONS

Illustration 6

The following are business transactions of Visperas Computer Shop for

the month of July, 2015. As bookkeeper of the company, you are to record these
transactions in the general journal and post the entries to the general ledger. Use the
chart of accounts for a service company on chapter 3.

Date Transactions

July 1 R. Visperas invested to the computer shop in cash for P100,000

July 2 Purchased computers on credit – P12,000
July 3 Purchased additional computers for cash – P6,000
July 6 Purchased airconditioning unit on credit – 10,000
July 7 R. Visperas invested computer equipment for the computer shop –
P50,000
July 10 Borrowed money from the bank payable in 2 years – P40,000
July 15 R Visperas made additional investment in cash – P75,000
July 16 Paid salaries to employees – P15,000
July 17 Made partial payment to the bank loan – P20,000
July 20 Purchased new furniture on credit – P10,000

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 July 21 Billed customers for services rendered on account – P30,000
July 25 Collected from customers billed on account – P10,000
July 27 Rendered services for cash to customers – P45,000
July 28 Paid telephone bills – P5,000
July 28 Paid rental of the computer shop – P10,000
July 29 Received electricity bill – P3,000
July 30 R. Visperas withdraws cash – P5,000
July 31 Paid water bill – P2,000
July 31 Paid salaries to employees – P15,000

Recording of transactions to the general journal:

Company Name: R. VISPERAS COMPUTER SHOP Page No. 0 1

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
July 1 Cash 100-01 1 0 0 0 0 0
Visperas Capital 300 1 0 0 0 0 0
To record cash investment of owner

2 Office Equipment 101-01 1 2 0 0 0

Accounts Payable 200-01 1 2 0 0 0
To record puchase of computer
equipment on credit

3 Office Equipment 101-01 6 0 0 0

Cash 100-01 6 0 0 0
To record puchase of computer
equipment for cash

6 Office Equipment 101-01 1 0 0 0 0

Accounts Payable 200-01 1 0 0 0 0
To record puchase of airconditioning
unit on credit

7 Office Equipment 101-01 5 0 0 0 0

Visperas Capital 300 5 0 0 0 0
To record investment of owner in
the form of computer equipment

10 Cash 100-01 4 0 0 0 0
Loans Payable 200-09 4 0 0 0 0
To record a loan from a bank
payable in 2 years

15 Cash 100-01 7 5 0 0 0
Visperas Capital 300 7 5 0 0 0
To record additional cash investment
of the owner

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 Company Name: R. VISPERAS COMPUTER SHOP Page No. 0 2
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
July 16 Salaries, wages & benefits 500-07 1 5 0 0 0
Cash 100-01 1 5 0 0 0
To record payment of salaries to
the employees

17 Loan Payable 200-09 2 0 0 0 0

Cash 100-01 2 0 0 0 0
To record partial payment to the
bank loan

20 Furniture and Fixtures 101-04 1 0 0 0 0

Accounts Payable 200-01 1 0 0 0 0
To record purchase of furnitures
on credit

21 Accounts Receivable 100-03 3 0 0 0 0

Service Revenue 400-01 3 0 0 0 0
To record revenue billed on account

25 Cash 100-01 1 0 0 0 0
Accounts Receivable 100-03 1 0 0 0 0
To record collection from customer

27 Cash 100-01 4 5 0 0 0
Service Revenue 400-01 4 5 0 0 0
To record revenue earned in cash

28 Communication Expenses 500-13 5 0 0 0

Cash 100-01 5 0 0 0
To record payment of telephone bills

28 Rent Expense 500-03 1 0 0 0 0

Cash 100-01 1 0 0 0 0
To record payment of rental for
the computer shop

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 Company Name: R. VISPERAS COMPUTER SHOP Page No. 03
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
July 29 Light and Water Expense 500-05 3000
Cash 100-01 3000
To record payment of electricity bill

30 Visperas Drawings 301 5000

Cash 100-01 5000
To record owner's drawings

31 Light and Water Expense 500-05 2000

Cash 100-01 2000
To record payment of water bill

31 Salaries, wages & benefits 500-07 15000

Cash 100-01 15000
To record payment of salaries to
the employees

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 Posting of journal entries to the general ledger

COMPANY'S NAME: R. VISPERAL COMPUTER SHOP GENERAL LEDGER

Account Title: CASH Account No. 100-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 1 Owner investment GJ1 1 0 0 0 0 0
3 Purchase of computer GJ1 6000
10 Bank loan GJ1 4 0 0 0 0
15 Owner add'l investment GJ1 7 5 0 0 0
16 Salaries of employees GJ2 15000
17 Payment for loan GJ2 20000
25 Collection of receivable GJ2 1 0 0 0 0
27 Cash services GJ2 4 5 0 0 0
28 Telephone bllls GJ2 5000
28 Rental for the month GJ2 10000
29 Electricity for the month GJ3 3000
30 Owner's drawings GJ3 5000
31 Water bill GJ3 2000
31 Salaries of employees GJ3 15000 189000

Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 21 Services on account GJ2 30000
25 Partial collection GJ2 10000 20000

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 Account Title: OFFICE EQUIPMENT Account No. 101-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 2 Purchase on account GJ1 12000
3 Purchase in cash GJ1 6000
6 Purchase on account GJ1 10000
7 Owner's investment GJ1 50000 78000

Account Title: FURNITURE & FIXTURES Account No. 101-04

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 20 Purchase on account GJ2 10000 10000

Account Title: ACCOUNTS PAYABLE Account No. 200-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 2 Purchase of computer GJ1 12000
6 Purchase of aircon GJ1 10000
20 Purchase of furnitures GJ2 10000 ( 32000)

Account Title: LOANS PAYABLE Account No. 200-09

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 10 2-year loan GJ1 40000
17 Partial payment GJ2 20000 ( 20000)

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 Account Title: VISPERAS CAPITAL Account No. 300

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 1 Owner's investment GJ1 100000
7 Computers investment GJ1 50000
15 Additional investment GJ1 75000 ( 225000)

Account Title: VISPERAS DRAWINGS Account No. 301

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 30 Owner's cash drawings GJ3 5000 5000

Account Title: SERVICE REVENUE Account No. 400-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 21 Services on account GJ2 30000
27 Cash services GJ2 45000 ( 75000)

Account Title: RENT EXPENSE Account No. 500-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 28 Rental for the month GJ2 10000 10000

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 Account Title: LIGHT & WATER EXPENSE Account No. 500-05

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 29 Electricity for the month GJ3 3000
31 Water bill for the month GJ3 2000 5000

Account Title: SALARIES, WAGES & BENEFITS Account No. 500-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 16 Salaries of employees GJ2 15000
31 Salaries of employees GJ3 15000 30000

Account Title: COMMUNICATION EXPENSES Account No. 500-13

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
July 28 Telephone bills GJ2 5000 5000

PREPARATION OF THE TRIAL BALANCE

The trial balance is prepared after posting all the journal entries to general
ledger. This is prepared to prove the equality of the debits and the credits.

The trial balance is the list of all accounts with their balances that are lifted
from the general ledger. It is listed in the following order”

1. Assets (arranged according to their liquidity)

2. Liabilities

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 3. Capital
4. Drawing
5. Revenue
6. Expenses

Using the problem on illustration 6, below is the trial balance:

R. VISPERAS COMPUTER SHOP

Trial Balance
July 31, 2016

DEBIT CREDIT

Cash 189,000
Accounts Receivable 20,000
Office Equipment 78,000
Furniture and Fixtures 10,000
Accounts Payable 32,000
Loans Payable 20,000
R. Visperas Capital 225,000
R. Visperas Drawings 5,000
Service Revenue 75,000
Salaries, wages & benefits 30,000
Communication Expense 5,000
Rent Expense 10,000
Light and Water Expense 5,000

Total 352,000 352,000

At the end of each entry, like totals, where no additional entries will be made,
a double rule is indicated.

Double Rule is a double line drawn under an amount when the amounts above
are totals and no other entries will be made.

ACCOUNTING PERIOD

The accounting period is the period in which accounting books of any entity are
prepared. It is the period for which books are balanced and the financial statements
are prepared.

Generally, the accounting period consists of 12 months. However the

beginning of the accounting period differs according to the organization’s adaption
or practice. It may be a calendar period or a fiscal period.

A calendar period indicates that a business organization begins accumulating

accounting records at the beginning of January 1 and subsequently stops at the end of
December 31. This annual accounting period imitates a basic twelve-month calendar.

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 A fiscal period arbitrarily sets the beginning of the accounting period to any
date of the year and financial data is accumulated for one year from this date. For
example, a fiscal year starting April 1 would end March 31 of the following year.

ADJUSTING ENTRIES

Adjusting entries are made in the accounting books at the end of an accounting
period. These are made after a trial balance is prepared. The purpose of adjusting
entries is to adjust revenues and expenses to the accounting period in which they
actually occurred. After adjusting entries are recorded in the accounting journals,
they are posted to the general ledger in the same way as any other accounting journal
entries.

There are six types of adjusting entries:

1. Accrued revenues
2. Unearned revenues
3. Accrued expenses
4. Prepaid expenses
5. Depreciation
6. Allowance for uncollectible accounts

Accrued Revenues

If you perform a service for a customer in one month, but don’t bill the
customer until the next month, you would make an adjusting entry showing the
revenue in the month you performed the service.

The entry is:

Debit Credit
Accounts Receivable 000
Service Revenue 000

For merchandising business, these are goods delivered during the month but
bill the customer on the next month.

The entry is:

Debit Credit
Accounts Receivable 000
Sales 000

Unearned Revenues

Unearned revenues refer to payments for goods to be delivered in the future

or services to be performed.

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 The adjusting entry will depend on the method adapted by the organization
in recording the advanced payment:

(a). Revenue Method

For example, a tenant paid in advance in September 1, 2016 a rental fee good for one
year amounting to P12,000. The entry in September 1, 2016 will be:

Debit Credit
Cash 12,000
Revenue 12,000

At December 31, 2016, an adjusting entry will be set-up for the actual revenue
earned (Sept to Dec = 4mos or P4,000) and the remaining unused portion as liability
(Jan to Aug = 8mos or P8,000).

The adjusting entry at the end of the year will be:

Revenue 8,000
Unearned revenue 8,000
Computation: P12,000/12mos x 8mos( Jan to Aug)

What is left as the revenue amount after the adjusting entry will be P4,000.

(b). Liability Method

Referring to the above example, the initial entry will be:

Debit Credit
Cash 12,000
Unearned revenue 12,000

The Adjusting Entry at the end of the year will be:

Unearned revenue 4,000

Revenue 4,000

What is left as the unearned revenue amount after the adjusting entry will be
P8,000.

Accrued Expenses

These are expenses that are already incurred by the business organization but
not yet paid as of the reporting date. A good example of accrued expenses is wages
paid to employees.

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 When a business firm owes wages to employees at the end of an accounting
period, they make an adjusting journal entry by debiting Salaries and wages expense
and crediting wages payable or accrued expense payable.

Example: Weekly wages (Monday to Saturday) are paid every Saturday amounting to
P12,000. If the Saturday is December 28, the 3 days which is December 29, 30 and 31 remain
unpaid at the end of the accounting period.

Therefore, the adjusting entry will be:

Debit Credit
Salaries and Wages 6,000
Accrued Expense Payable 6,000
(Computation: P12,000/6days x 3 days)

Prepaid Expenses

Prepaid expense is a very descriptive title. Prepaid expenses are assets that are
paid for in advance and gradually get used up during the accounting period.

A common example of prepaid expenses is office supplies. A company buys

and pays for office supplies. Gradually, during the accounting period, the office
supplies are used up. As they are used up, they become an expense. During the
month when the office supplies are used, an adjusting entry is made to debit office
supply expense and credit prepaid office supplies.

The adjusting entry will depend on what method the business organization
adapts while recording the initial transaction.

(a). Asset method

For example, the business organization purchased supplies in March 1, 2016 for
P24,000. At the end of December 31, 2016, the used up portion which will be charged to
expense will be equivalent to 10 months (March 1 to Dec 31, 2016) and the unused portion
which will be an asset is 2 months (Jan & Feb, 2017).

The entry when the supplies are purchased will be:

Debit Credit
Supplies 24,000
Cash or Accts Payable 24,000

The adjusting entry to charge the used up portion to expenses will be:

Supplies expenses 20,000

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 Supplies 20,000
(Computation: P24,000/12mos x 10mos March 1 to Dec 31, 2016 = P20,000)

(b). Expense method

The entry when the supplies are purchased will be:

Debit Credit
Supplies expense 24,000
Cash or Accts Payable 24,000

The adjusting entry at Dec 31, 2016 to set up the asset portion will be:

Supplies 4,000
Supplies expense 4,000

Depreciation

Depreciation is the process of allocating the cost of an asset, such as

machinery or a piece of equipment, over the serviceable or economic life of the asset.
Adjusting entries are a little different for depreciation. Business owners have to take
accumulated depreciation into account. Accumulated depreciation is just what it
says - the accumulated depreciation expense of a company’s assets over the life of the
company.

The accumulated depreciation account on the balance sheet is called a contra-

asset account as it is shown as a deduction to the cost of the asset being depreciated.
Increases are recorded as credits in contra-asset accounts.

When an asset is purchased, it depreciates by some amount every month

which is charged to expense while the credit is regarded as contra-asset account that
is accumulated over the estimated life of the asset.

This type of adjusting entry has the following terminologies:

a. Cost of the Asset – this is the amount recorded when the asset is purchased.
b. Salvaged value – also called as scrap value or residual value, this is the estimated
amount of recovery at the end of the asset’s useful life.
c. Estimated useful life – this is an accountant’s fair estimate of the economic life
of the asset.
d. Carrying amount or net book value – this is the difference between the cost of the
asset and the accumulated depreciation.

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 The formula in the computation of depreciation expense is:

Depreciation expense = Cost of the asset – Salvaged value

Estimated Useful Life

The most common method used in computing depreciation of an asset is the

straight line method.

Straight line depreciation method charges cost evenly throughout the useful
life of a fixed asset. This depreciation method is appropriate where economic benefits
from an asset are expected to be realized evenly over its useful life.

Example: A machinery having a useful life of 5 years is purchased on June 1, 2016.

Cost of the asset is P25,000 whereas its residual value is expected to be P1,000. Calculate
depreciation expense for the year ending December 31, 2016.

Computation:

P25,000 – P1,000
Depreciation expense = 5 years
= P4,800 per year/12 months
= P400 per month x 7 months
= P2,800

Adjusting entry at December 31, 2016:

Debit Credit
Depreciation expense 2,800
Accumulated depreciation 2,800

Allowance for Uncollectible Account

The allowance for doubtful accounts is a reduction of the total amount of

accounts receivable appearing on a company’s balance sheet, and is listed as a
deduction immediately below the accounts receivable line item. This deduction is
classified as a contra asset account.

The allowance for doubtful accounts, which is a credit entry, represents

management’s best estimate of the amount of accounts receivable that will not be paid
by customers. The debit entry is charged to expense – Uncollectible account expense.

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 The adjusting entry is:
Debit Credit
Uncollectible account expense 000
Allowance for uncollectible account 000

There are two methods of computing this adjusting entry:

(a) Based on percentage of account sales for goods sold or services rendered

Example: The total sales is P100,000 and P25,000 represents cash sales. The balance of
accounts receivable is P30,000. About 5% is proven uncollectible.

Adjusting entry will be:

Debit Credit
Uncollectible account expense 3,750
Allowance for uncollectible account 3,750
(Computation: P100,000-25,000=P75,000 x 5%)

(b) Based on accounts receivable balance

Uncollectible account expense 1,500

Allowance for uncollectible account 1,500
(Computation: P30,000 x 5%)

Take the following cases in providing adjusting entries for allowance for
uncollectible accounts:

Case 1. The balance of allowance for uncollectible account in the books is more than
the required allowance

Sales on account P500,000

Accounts Receivable 100,000
Allowance for uncollectible accounts 7,000

About 5% is assumed to be uncollectible. The adjusting entry will be based on the

accounts receivable balance.

Computation:

Accounts receivable P100,000

Uncollectible rate x 5%
Required allowance P 5,000

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 Allowance balance P 7,000
Difference P 2,000

Adjusting entry will be:

Debit Credit
Allowance for uncollectible accounts 2,000
Uncollectible account expense 2,000

Note: The allowance for uncollectible account balance in the books should be reduced
by P2,000 as the required is only P5,000 and not the P7,000

Case 2. The balance of allowance for uncollectible account in the books is less than the
required allowance

Cash sales P600,000

Sales on account 400,000
Accounts receivable 50,000
Allowance for uncollectible accounts 4,000

About 2% is assumed to be uncollectible based on sales on account

Computation:

Sales on account P400,000

Uncollectible rate 2%
Required allowance P8,000
Allowance balance 4,000
Difference P 4,000

Adjusting entry will be:

Debit Credit
Uncollectible account expense 4,000
Allowance for uncollectible account 4,000

Note: The allowance for uncollectible account balance in the books will be increased by
P4,000 as the required allowance should be P8,000.

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 FINANCIAL STATEMENTS

The Financial Statements represent a formal record of the financial activities of

business organization. These are written reports that quantify the financial strength,
performance and liquidity of a company. Financial Statements reflect the financial
effects of business transactions and events on the business

The four main types of financial statements are:

Statement of Financial Position

The Statement of Financial Position, also known as the Balance Sheet, presents
the financial position of an entity as of a given date. It has two forms: (a) account form,
(b) report form. It is comprised of the following three elements:

1. Assets- something a business owns or controls (e.g. cash, inventory, plant and
machinery, etc)
2. Liabilities- something a business owes to someone (e.g. creditors, bank loans,
etc)
3. Equity or Capital- what the business owes to its owners. This represents the
amount of capital that remains in the business after its assets are used to
pay off its outstanding liabilities. Equity or capital therefore represents the
difference between the assets and liabilities.

Statement of Income

Statement of Income or Income Statement, also known as the Profit and Loss
Statement, reports the company’s financial performance in terms of net profit or loss
over a specified period. Income Statement is composed of the following two elements:

1. Income- what the business has earned over a period (e.g. sales or service
revenue, dividend income, interest income, etc)
2. Expense- the cost incurred by the business over a period (e.g. salaries and
wages, depreciation, rental charges, etc)

Net profit or loss is arrived at by deducting expenses from income.

Statement of Cash Flow

Statement of Cash Flow or Cash Flow Statement presents the movement in

cash and bank balances over a period. The movement in cash flows is classified into
the following segments:

1. Operating Activities-represents the cash flow from primary activities of a

business.
2. Investing Activities- represents cash flow from the purchase and sale of assets
other than inventories (e.g. purchase of a machinery, etc)

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 3. Financing Activities- represents cash flow generated or spent on raising and
repaying share capital and debt together with the payments of interest and
dividends.

There are two methods in preparing the cash flow statement:

a. Direct method- The direct method of presenting the statement of cash flows
presents the specific cash flows associated with items that affect cash flow.

Items that typically include:

- Cash collected from customers

- Interest and dividends received
- Cash paid to employees
- Cash paid to suppliers
- Interest paid
- Income taxes paid

b. Indirect method- Under the indirect method of presenting the statement of

cash flows, the presentation of this statement begins with net income or loss,
with subsequent additions to or deductions from that amount for non-cash
revenue and expense items, resulting in net income provided by operating
activities.

The indirect method of presentation is very popular because the

information required for it is relatively easily assembled from the accounts
that a business normally maintains in its chart of accounts.

Statement of Changes in Equity or Capital

Statement of Changes in Equity or Capital details the movement in owner’s

equity over a period. The movement in owner’s equity or capital is derived from the
following components:

1. Net Profit or loss during the period as reported in the income statement
2. Owner’s capital initial investment or additional investment
3. Owner’s drawings
4. Gains or losses recognized directly in equity (e.g. revaluation surpluses)
5. Effects of a change in accounting policy or correction of accounting error

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 FORMATS OF THE BASIC FINANCIAL STATEMENTS

A. Statement of Income

For a Merchandising Business

(NAME OF COMPANY)
Statement of Income
For the Month Ended July 31_______

Gross Sales 0.00

Less: Sales Returns & Allowances 0.00
Sales Discounts 0.00 0.00
Net Sales 0.00
Deduct: Cost of Sales 0.00
Gross Income 0.00
Less: Expenses
Light and water 0.00
Rent expense 0.00
Advertising expense 0.00
Freight out 0.00
Salaries expenses 0.00
Telephone expense 0.00 0.00
Net Income (loss) 0.00

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 (NAME OF COMPANY)
Statement of Cost of Sales
For the Month Ended July 31_______

Merchandise Inventory, beg 0.00

Add: Purchases 0.00
Freight In 0.00
Total Purchases 0.00
Less: Purchase Returns 0.00
Purchase Discounts 0.00 0.00
Net Purchases 0.00
Total Goods Available for Sale 0.00
Less: Merchandise Inventory, end 0.00
Cost of Sales 0.00

For a Service Business

(NAME OF COMPANY)
Statement of Income
For the Month Ended July 31_______

Service Income 0.00

Less: Expenses
Light and water 0.00
Rent expense 0.00
Advertising expense 0.00
Salaries expenses 0.00
Telephone expense 0.00 0.00
Net Income (loss) 0.00

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 Statement of Changes in Capital

(NAME OF COMPANY)
Statement of Changes in Capital
For the Month Ended July 31_____

Original capital 0.00

Add (Deduct):
Additional investment 0.00
Net income (loss) 0.00
Drawings (0.00)
Net Increase (Decrease) in Capital 0.00
Total Capital, July 31 0.00

B. Statement of Financial Position

Account Form:
(NAME OF COMPANY)
Statement of Financial Position
As of July 31_____

ASSETS LIABILITIES
Current Assets: Current Liabilities:
Cash 0.00 Accounts Payable 0.00
Accounts Receivable 0.00 Vat Payable 0.00
Supplies 0.00 Total Current Liabilities 0.00
Total Current Assets 0.00
Non-current Liabilities:
Non-current Assets: Loans Payable 0.00
Building 0.00 Notes Payable 0.00
Service Equipment 0.00 Total Non-Current Liabilities0.00
Office Equipment 0.00 TOTAL LIABILITIES 0.00
Furnitures 0.00 CAPITAL
Total Non-Current Assets 0.00 Mr. XXX Capital 0.00

Total Assets 0.00 Total Liabilities & Capital 0.00

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 Report Form:

(NAME OF COMPANY)
Statement of Financial Position
As of July 31_____

ASSETS
Current Assets:
Cash 0.00
Accounts Receivable 0.00
Supplies 0.00
Total Current Assets 0.00
Non-current Assets:
Service Equipment 0.00
Office Equipment 0.00
Furnitures 0.00
Total Non-Current Assets 0.00
Total Assets 0.00

LIABILITIES
Current Liabilities:
Accounts Payable 0.00
Vat Payable 0.00
Total Current Liabilities 0.00
Non-current Liabilities:
Loans Payable 0.00
Notes Payable 0.00
Total Non-Current Liabilities 0.00
Total Liabilities 0.00
CAPITAL
Mr. XXX Capital 0.00
Total Liabilities & Capital 0.00

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 The report form format of statement of financial position is commonly used by
business organizations.

C. Statement of Cash Flow

Direct Method:

(NAME OF COMPANY)
Statement of Cash Flow
For the Month Ended July 31_____

Cash Flow from Operating Activities:

Cash received from customers 0.00
Cash paid to advertisement (0.00)
Cash paid to telephone (0.00)
Cash paid to salaries (0.00)
Cash paid to light and water (0.00)
Net cash flow from operating activities 0.00

Cash Flow from Investing Activities:

Cash paid for purchase of office equipment (0.00)
Cash received from sale of vehicle 0.00
Net cash flow from investing activities 0.00

Cash Flow from Financing Activities:

Cash investment of owner 0.00
Additional cash investment from owner 0.00
Cash borrowed from the bank 0.00
Cash payment to the bank (0.00)
Cash withdrawal by owner (0.00)
Net cash flow from financing activities 0.00

Net Increase (Decrease) in Cash 0.00

Cash balance, beginning 0.00
Cash Balance, end 0.00

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 Indirect Method:

(NAME OF COMPANY)
STATEMENTS OF CASH FLOWS
For the Month Ended_______

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss) 0.00
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation expense 0.00
Changes in assets and liabilities:
Accounts receivables 0.00
Supplies (0.00)
Other current assets 0.00
Accounts payables 0.00
Net cash provided by (used for) operating activities 0.00

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of office equipment (0.00)
Proceeds from sale of vehicle 0.00
Net cash used for investing activity 0.00

CASH FLOWS FROM FINANCING ACTIVITIES

Cash investment from owner 0.00
Additional cash investment from owner 0.00
Cash withdrawal by owner (0.00)
Cash received from bank loan 0.00
Cash payment of loan (0.00)
Net cash provided by (used for) financing activities 0.00

NET INCREASE (DECREASE) IN CASH 0.00

CASH, beginning 0.00
CASH, end 0.00

The indirect method of cash flow statement preparation is commonly used by

business organizations registered with the Securities and Commission (SEC).

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 174

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 TEST MATERIAL 10-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: List down the rules of debits and credits below.

Account Type Normal Balance In Case of Increase In Case of Decrease

Asset

Expense

Liability

Revenue Income

Capital/Equity

Drawings

Contra Accounts

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 176

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 TEST MATERIAL 10-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: State the value received and value parted with on the following transactions.

ValueReceived Value Parted with

1. Received initial investment from the
owner
2. Purchased supplies on credit
3. Received cash from the bank as loan
for 2 yrs.
4. Deposited money to the bank
5. Give cash to the owner as drawings
6. Sold merchandise for cash
7. Sold merchandise for credit
8. Paid electricity in cash
9. Purchased merchadise for sale on
credit
10. Received return merchandise from
customer
11. Send merchandise for return to
supplier
12. Collected cash from customer on
account
13. Paid the debt due to the creditor or
supplier
14. Paid salary of the store helper
15. Purchased computer on account

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 178

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 TEST MATERIAL 10-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: State the value received and value parted with on the following transactions.

ValueReceived Value Parted with

1. Purchased delivery truck for cash
2. Purchased equipment for cash
3. Purchased furniture on credit
4. Rendered delivery service for cash
5. Purchased delivery truck on account
6. Rendered delivery service on credit
7. Paid rental for the month
8. Purchased supplies on credit
9. Paid telephone bills in cash
10. Paid utility bills in cash
11. Collected cash from customer on
account in #6
12. Deposited money collected to the
bank
13. Paid the accounts payable in item no. 8

14. Paid salary of truck helper in cash

15. Owner withdraw cash

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 TEST MATERIAL 10-4
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Encircle the letter of the correct answer.

1. Cecille Yu invested P250,000 in an employment agency.

a. Debit cash, credit accounts payable

b. Debit cash, credit C. Yu Capital
c. Debit C. Yu Capital, credit cash
d. None of the above

2. Pays monthly rental for the office for P15,000.

a. Debit cash, credit C. Yu capital

b. Debit rent expense, credit cash
c. Debit prepaid rent, credit cash
d. None of the above

3. Purchased service equipment for P30,000.

a. Debit cash, credit accounts payable

b. Debit transportation expense, credit cash
c. Debit service equipment, credit accounts payable
d. Debit service equipment, credit cash

4. Purchase office equipment on credit for P45,000.

a. Debit office equipment, credit cash

b. Debit office equipment, credit C. Yu capital
c. Debit office equipment, credit accounts payable
d. Debit office equipment, credit notes payable

5. Purchase supplies for P10,000 paying P5,000 cash and the balance on credit.

a. Debit supplies expense, credit cash

b. Debit supplies, credit accounts payable
c. Debit supplies expense, credit cash & accounts payable
d. Debit supplies, credit cash & accounts payable

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 6. Paid the office equipment previously purchased on credit.

a. Debit cash, credit accounts payable

b. Debit accounts payable, credit cash
c. Debit notes payable, credit cash
d. Debit office equipment, credit cash

7. Billed customers on account for janitorial services for P75,000.

a. Debit cash, credit service revenue

b. Debit accounts receivable, credit service revenue
c. Debit accounts receivable, credit cash
d. Debit salaries, credit cash

8. Paid salaries to employees for P35,000.

a. Debit salaries & wages payable, credit cash

b. Debit salaries, wages & benefits, credit cash
c. Debit accounts payable, credit cash
d. Debit cash, credit salaries & wages payable

9. Billed to customers for cash on messengerial services for P50,000.

a. Debit accounts receivable, credit service revenue

b. Debit cash, credit service revenue
c. Debit cash and accounts receivable, credit service revenue
d. Debit notes receivable, credit service revenue

10. Withdraw cash for personal use for P5,000.

a. Debit cash., credit C. Yu capital

b. Debit C. Yu capital, credit cash
c. Debit C. Yu drawings, credit cash
d. Debit cash, credit C. Yu drawings

11. Paid telephone bills for P5,600.

a. Debit C. Yu capital, credit cash

b. Debit communication expense, credit cash
c. Debit light & water, credit cash
d. Debit communication expense, credit accounts payable

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 12. Collected the accounts from customer previously billed on credit.

a. Debit accounts receivable, credit cash

b. Debit accounts receivable, credit service revenue
c. Debit cash, credit accounts receivable
d. Debit cash, credit service revenue

13. Paid the half payable on supplies.

a. Debit accounts payable, credit cash

b. Debit supplies, credit cash
c. Debit supplies expense, credit cash
d. Debit supplies, credit accounts payable

14. Billed customer for P50,000 receiving P10,000 cash and the balance with a
promissory note.

a. Debit cash, credit service revenue

b. Debit notes receivable, credit service revenue
c. Debit cash and notes receivable, credit service revenue
d. Debit cash and accounts receivable, credit service revenue

15. Recorded used supplies for the month for P1,500.

a. Debit supplies, credit supplies expense

b. Debit supplies expense, credit cash
c. Debit supplies expense, credit supplies
d. Debit C. Yu Capital, credit supplies

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 184

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 TEST MATERIAL 10-5
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Using the answer sheet below, write the accounts and amounts to be debited and
credited.

1. BAA opened a computer repair ship by investing P200,000 to the business.

2. Paid rent for the month on the shop space for P15,000.
3. Purchased shop supplies in cash for P10,000.
4. Purchased additional supplies on credit from Grace’s Trading for P16,500.
5. Rendered computer repairs and collected cash for P55,000.
6. Paid Grace’s Trading for the amount owed from the store.
7. Rendered computer repairs to J. Lumaban on credit for P40,000.
8. Paid salaries to the shop staffs for P20,000.
9. Paid electricity bills for P5,600.
10. Collected from J. Lumaban for repairs extended on credit.

DEBIT CREDIT
1. Account Amount Account Amount
2.
3.
4.
5.
6.
7.
8.
9.
10.

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 TEST MATERIAL 10-6
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Using the answer sheet below, write the accounts and amounts to be debited and
credited.

1. Grace Garcia opened a flower shop by investing P200,000 cash, office

equipment for P10,000 and furniture for P15,000.
2. Paid the rental of the flower shop for P5,000.
3. Purchased flowers as merchandise inventory for sale for P75,000.
4. Purchased supplies on credit for P4,000.
5. Sold merchandise to customers for cash in the amount of P15,000.
6. Sold merchandise to customers on credit for P25,000.
7. Paid salaries to assistant for P12,000.
8. Paid electricity bills for P3,000.
9. Withdraws cash from the business for P3,000.
10. Collected from customer for 20,000.

DEBIT CREDIT
1. Account Amount Account Amount
2.
3.
4.
5.
6.
7.
8.
9.
10.

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 TEST MATERIAL 10-7
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Journalize the following transactions and post these to the general ledger. Use the
forms as provided for.

In April, 2016, J. Lumaban open a furniture making business and incurred the
following transactions during the month:

April 1 Invested P500,000 to start the business

April 2 Secure permits and licenses for P10,000 cash
April 2 Paid rental for the month amounting to P15,000 and two months
rental deposit for P30,000
April 3 Purchased P100,000 service equipment making a cash payment of
P25,000 and issued a 1-year promissory note for the balance
April 5 Purchase supplies from Lean Merchandising for P15,000 on credit
April 9 Collected cash from customer for a delivery of sala set for P60,000
April 13 Completed and delivered a cabinet to Joan Cruz on credit for P45,000
April 15 Paid salaries to employees amounting to P17,500
April 15 Paid delivery and transportation services to XY Trucking for P7,400
April 18 Paid the amount due to Lean Merchandising
April 20 Withdraws cash for personal use – P5,000
April 23 Received P30,000 from Joan Cruz as partial payment of account
April 25 Paid telephone bills for P6,700
April 26 Collected P8,400 for the delivery of 5 chairs
April 28 Paid electricity for P8,900
April 29 Paid water bill of P1,300
April 30 Paid salaries to employees for P17,500
April 30 Paid monthly payment of the notes payable for P6,250

Requirements:

a. Journalize transaction in a general journal

b. Post the journal entries to the general ledger
c. Prepare trial balance

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 General Journal

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 Company Name: Page No. 02
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

191

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 Company Name: Page No. 03
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

192

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 Company Name: Page No. 04
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 Company Name: Page No. 05
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 General Ledger

COMPANY'S NAME: GENERAL LEDGER

Account Title: CASH Account No. 100-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Account Title: OFFICE SUPPLIES Account No. 100-06

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: SERVICE EQUIPMENT Account No. 101-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: RENTAL DEPOSIT Account No. 101-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: ACCOUNTS PAYABLE Account No. 200-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: NOTES PAYABLE Account No. 200-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Account Title: J. LUMABAN CAPITAL Account No. 300

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: J. LUMABAN DRAWINGS Account No. 301

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: SERVICE REVENUE Account No. 400-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: TAXES & LICENCES Account No. 500-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: RENT EXPENSE Account No. 500-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Account Title: SALARIES, WAGES & BENEFITS Account No. 500-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: LIGHT & WATER Account No. 500-05

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: COMMUNICATION EXPENSES Account No. 500-13

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: TRANSPORTATION EXPENSES Account No. 500-14

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Trial Balance

J. LUMABAN FURNITURE SHOP

Trial Balance
April 30,2016

Debit Credit

TOTAL

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 200

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 TEST MATERIAL 10-8
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Journalize the following transactions and post these to the general ledger. Use the
forms as provided for.

During October, 2016 Grace Garcia started a small business : GG Motorshop.

During the month the following transactions were incurred:

October 1 Invested P250,000 to start the business

October 2 Paid P30,000 cash for various service equipment
October 5 Paid P7,500 for the monthly rental of the shop
October 6 Purchased various supplies from Lean Merchandising on credit for
P18,500
October 7 Bought additional service equipment for P65,000, with cash
downpayment of P30,000 and balance on credit
October 8 Completed repair works and collected P45,000 cash
October 10 Purchased additional supplies for cash amounting to P9,200
October 13 Billed J. Lumaban for the repair of car amounting to P15,000 on credit
October 15 Paid the helper salaries for P12,000
October 18 Paid the amount due to Lean Merchandising
October 23 Collected from J. Lumaban
October 25 Collected cash from a customer for the repair of car amounting to
P32,000
October 28 The owner withdraws cash for P16,000
October 30 Paid light and water for P7,500
October 31 Paid telephone bill for P3,200
October 31 Paid salaries to shop helper for P12,000
October 31 Used supplies for the month is P5,100

Requirement:

a. Journalize transaction in a general journal

b. Post the journal entries to the general ledger
c. Prepare trial balance

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 General Journal

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

202

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 Company Name: Page No. 02
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

203

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 Company Name: Page No. 03
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

204

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 Company Name: Page No. 04
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

205

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 Company Name: Page No. 05
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 General Ledger

COMPANY'S NAME: GENERAL LEDGER

Account Title: CASH Account No. 100-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Account Title: OFFICE SUPPLIES Account No. 100-06

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: SERVICE EQUIPMENT Account No. 101-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: ACCOUNTS PAYABLE Account No. 200-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: G.G,GARCIA

GARCIA CAPITAL
CAPITAL Account No. 300

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Account Title: G.
G, GARCIA
GARCIA DRAWINGS
DRAWINGS Account No. 301

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: SERVICE REVENUE Account No. 400-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: RENT EXPENSE Account No. 500-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: LIGHT & WATER Account No. 500-05

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Account Title: SUPPLIES EXPENSES Account No. 500-06

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: SALARIES, WAGES & BENEFITS Account No. 500-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: COMMUNICATION EXPENSES Account No. 500-13

DATE EXPLANATION PR DEBIT CREDIT BALANCE

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 Trial Balance

GG MOTOR SHOP
Trial Balance
October 31,2016

Debit Credit

TOTAL

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 212

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 TEST MATERIAL 10-9
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Re-arrange the following general ledger balances as of December 31, 2015 by
preparing a trial balance for Librando’s Delivery Services.

Service revenue 2,613,740

Librando’s Capital 1,000,000

Librando’s drawings 102,500

Cash 303,500

Accounts receivable 214,000

Delivery vehicle 400,000

Building 1,000,000

Land 2,000,000

Accounts payable 109,400

Mortgage payable 1,100,000

Prepaid insurance 21,450

Office supplies 10,320

Office equipment 111,650

Accumulated depreciation-office equipment 21,430

Accumulated depreciation-delivery vehicle 122,800

Accumulated depreciation – building 503,950

Salaries, wages & benefits 505,300

Gasoline expenses 802,600

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 Answer Sheet for Test Material 10-9

LIBRANDO'S DELIVERY SERVICES

Trial Balance
December 31,2015

Debit Credit

TOTAL

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 TEST MATERIAL 10-10
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Identify the following.

_______________ 1. It is the period in which accounting books of any entity are

prepared. It is the period for which books are balanced and the
financial statements are prepared.

_______________ 2. This refers to payments for goods to be delivered in the future

or services to be performed.

_______________ 3. This is an accounting period which indicates that a business

organization begins accumulating accounting records at the
beginning of January 1 and subsequently stops at the end of
December 31.

_______________ 4. This is an accounting period which arbitrarily sets the

beginning of the accounting period to any date of the year and
financial data is accumulated for one year from this date.

_______________ 5. These are expenses that are already incurred by the business
organization but not yet paid as of the reporting date.

_______________ 6. These are assets that are paid for in advance and gradually get
used up during the accounting period.

_______________ 7. This is the process of allocating the cost of an asset, such as

machinery or a piece of equipment, over the serviceable or
economic life of the asset.

_______________ 8. This is a reduction of the total amount of accounts receivable

appearing on a company’s balance sheet.

_______________ 9. These represent a formal record of the financial activities of

business organization. These are written reports that quantify
the financial strength, performance and liquidity of a company.

_______________ 10. This financial statement presents the financial position of an

entity as of a given date.

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 _______________ 11. Its purpose is to adjust revenues and expenses to the
accounting period in which they actually occurred.

_______________ 12. This financial statement reports the company’s financial

performance in terms of net profit or loss over a specified
period.

_______________ 13. This financial statement presents the movement in cash and
bank balances over a period.

_______________ 14. This financial statement details the movement in owner’s

equity over a period.

_______________ 15. This method of presenting the statement of cash flows

begins with net income or loss, with subsequent additions
to or deductions from that amount for non-cash revenue and
expense items, resulting in net income provided by operating
activities.

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 TEST MATERIAL 10-11
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Indicate the normal balance of the following accounts in the adjusted trial balance.
Put X on the space provided.

Debit Credit

1. Accounts receivable ______ ______

2. Supplies ______ ______
3. Accounts payable ______ ______
4. Insurance expense ______ ______
5. Mr. Y Capital ______ ______
6. Telephone expenses ______ ______
7. Cash ______ ______
8. Unearned income ______ ______
9. Mr. Y Drawings ______ ______
10. Accumulated depreciation ______ ______
11. Prepaid insurance ______ ______
12. Rent expense ______ ______
13. Service revenue ______ ______
14. Accrued expense payable ______ ______
15. Allowance for uncollectible accounts ______ ______
16. Used Supplies ______ ______
17. Notes receivable ______ ______
18. Office equipment ______ ______
19. Depreciation expense ______ ______
20. Uncollectible account expense ______ ______

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 218

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 TEST MATERIAL 10-12
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Indicate the the accounts to be credited on the following accounts that are usually
used in the adjusting entries.

Account to be Credited

1. Allowance for uncollectible expense _____________________

2. Unearned revenue _____________________

3. Prepaid rent _____________________

4. Supplies expense _____________________

5. Depreciation expense _____________________

6. Salary expense _____________________

7. Supplies on hand _____________________

8. Revenue _____________________

9. Accounts receivable _____________________

10. Interest expense _____________________

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 220

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 TEST MATERIAL 10-13
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Give the adjusting entry of the following.

1. The business has an account receivable balance of P100,000 of which, 10% is

uncollectible.

Debit: P______________________

Credit: P______________________

2. Accrued salaries at the end of the year is P25,500.

Debit: P______________________

Credit: P______________________

3. One month’s interest on loan has accrued for P7,800.

Debit: P______________________

Credit: P______________________

4. The balance of unused supplies in Jan 1 is P12,000. At Dec 31, the balance is
now P10,000.

Debit: P______________________

Credit: P______________________

5. Depreciation of furniture is estimated at P13,600.

Debit: P______________________

Credit: P______________________

6. Three months of rent has accrued and remained unrecorded for P30,000.

Debit: P______________________

Credit: P______________________

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 7. A service was conducted to a customer for P35,500 in December 31 and was
only billed the following year.

Debit: P______________________

Credit: P______________________

8. The company purchased on June 1 a delivery vehicle for P480,000 with an

estimated useful life of 5 years and no salvaged value.

Debit: P______________________

Credit: P______________________

9. The company has unearned income balance at Jan 1 for P48,000 which is an
advance payment of a customer for a 3-year service. The earned income of
one year is not yet recorded as of December 31.

Debit: P______________________

Credit: P______________________

10. The company’s insurance expense of P24,000 has an unexpired portion of

P6,000.

Debit: P______________________

Credit: P______________________

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 TEST MATERIAL 10-14
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Encircle the correct answer of the statement.

1. The information contained in the financial statements is useful to the:

a. Owners of the business organization
b. Creditors and investors, customers and government entities
c. Management and employees
d. All of the above

2. The statement of financial position provides information about:

a. The financial position of the business
b. The function of accounting system
c. The profitability of the business
d. None of the above

3. The statement of income provides information about:

a. The company’s performance in terms of profit or loss
b. The financial position of the business
c. The resources acquired by the business
d. The function of accounting system

4. What financial statements are prepared at the end of the accounting period?
a. Statement of income
b. Statement of financial position and changes in owner’s capital
c. Statement of cash flows
d. All of the above

5. Which of the following would not have any effect on the statement of
income?
a. Drawings made by the owner
b. Rent expense
c. Revenue or income
d. Used supplies

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 6. The balance sheet can be presented in:

a. Report form
b. Account form
c. Either a or b
d. None of the above

7. Preparation of the financial statement will be made easier if facilitated

through the preparation of:

a. Trial balance
b. The general ledgers
c. Journal entries
d. Worksheet

8. An item not usually found in the statement of financial position is:

a. Unearned revenue
b. Allowance for uncollectible accounts
c. Accumulated depreciation
d. None of the above

9. Information about the profit or loss of the business is reported on the:

a. Statement of financial position

b. Statement of changes in equity
c. Statement of income
d. Statement of cash flows

10. The statement of financial position shows:

a. The accumulated revenues and expenses

b. The changes in owners capital
c. A list of all assets of the business
d. None of the above

11. Which is one not a segment of statement of cash flows?

a. Investing activities
b. Operating activities
c. Financing activities
d. None of the above

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 12. The normal reporting of an office equipment in the statement of financial
position is:

a. Subtract the accumulated depreciation from the cost of the asset

b. Add the accumulated depreciation to the cost of the asset
c. Report only the cost of the asset
d. None of the above

13. Which of the following is a liability?

a. Rent revenue
b. Unearned revenue
c. Accumulated depreciation
d. Allowance for uncollectible accounts

14. Which of the following is not a contra-asset account?

a. Accumulated depreciation
b. Allowance for uncollectible accounts
c. Accrued expense
d. None of the above

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 226

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 TEST MATERIAL 10-15
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Prepare adjusting journal entries and adjusted trial balance of the following based
on the unadjusted trial balance below.

A. UMAPAS WAREHOUSING & LOGISTICS SERVICES

Trial Balance
December 31,2015

Debit Credit
Cash 225,000.00
Accounts receivable 109,800.00
Prepaid insurance 23,500.00
Supplies 10,100.00
Office equipment 55,500.00
Accumulated depreciation - OE 13,100.00
Delivery vehicle 250,000.00
Accumulated depreciation - DV 45,500.00
Building 800,000.00
Accumulated depreciation - Bldg 161,000.00
Acounts payable 117,500.00
Unearned revenue 30,500.00
Notes payable 100,000.00
A. Umapas Capital 688,300.00
A. Umapas Drawings 155,000.00
Service revenue 800,000.00
Salaries, wages and benefits 220,500.00
Gasoline expenses 75,600.00
Light and water 22,000.00
Communication expenses 8,900.00
TOTAL 1,955,900.00 1,955,900.00

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 Adjustment data:

1. An examination of the insurance policies showed that P13,500 of insurance

expired.
2. Office supplies still on hand is P5,100.
3. Estimated depreciation rates: office equipment 10%, delivery vehicle 20%,
building 10%.
4. Of the amount credited to unearned revenue, only P10,500 had been earned
at the end of the year.
5. Interest of 5% has accrued on the notes payable.
6. Accrued salaries is P35,500.
7. Unrecorded revenue is P23,400.

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 Answer Sheet for Test Material 10-15

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 A. UMAPAS WAREHOUSING & LOGISTICS SERVICES
Adjusted Trial Balance
December 31,2015

Debit Credit

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 TEST MATERIAL 10-16
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Prepare adjusting journal entries and adjusted trial balance of the following based
on the unadjusted trial balance below.

DARRYL REALTY BROKERAGE

Trial Balance
December 31,2015

Debit Credit
Cash 114,450.00
Accounts receivable 109,800.00
Prepaid insurance 55,400.00
Office equipment 137,500.00
Accumulated depreciation - OE 46,000.00
Service vehicle 557,600.00
Accumulated depreciation - SV 109,500.00
Acounts payable 111,000.00
Unearned revenue 35,500.00
Darryl Capital 600,000.00
Darryl Drawings 60,000.00
Commission Earned 486,150.00
Salaries, wages and benefits 216,000.00
Gasoline expenses 42,000.00
Light and water 68,400.00
Communication expenses 27,000.00
TOTAL 1,388,150.00 1,388,150.00

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 Adjustment data:

1. Expired insurance for the period is P20,400.

2. Estimated depreciation of office equipment is P12,000, Service vehicle is
P26,700.
3. The unearned revenue balance at Dec 31 is P15,000.
4. On December 31, five days salaries is accrued at P2,000/day.
5. Advertising is accrued at year end for P9,550.

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 Answer Sheet for Test Material 10-16

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 DARRYL REALTY BROKERAGE
Adjusted Trial Balance
December 31,2015

Debit Credit

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 CHAPTER

11
THE ACCOUNTING CYCLE
OF A SERVICE BUSINESS

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Describe the nature of transactions in a service
business;
☞ Record business transaction of service business to
different journals;
☞ Post journal entries to the general and subsidiary
ledgers;
☞ Be able to prepare the following for a service business:
a. Trial balance
b. Worksheet and adjusting entries
c. Different financial statements
d. Closing entries
e. Post-closing trial balance
☞ Complete the accounting cycle.

The Service Business is the most simple to account of the three types of business
organizations because it only revolves around the generation of service revenues
and payments of expenses; no complicated processes and does not maintain huge
inventories.

This chapter will present the entire accounting process of a service business,
from journalizing of transactions to the preparation of the basic financial statements.

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 To facilitate the preparation of the financial statements, a worksheet is
prepared. This worksheet is a columnar sheet in which the financial condition of the
business organization is summarized; starting with the trial balance on the first two
columns and ends with the balance sheet on the last two columns.

Let’s review The Rules of Debit And Credit to guide us in preparing the journal
entries.

Rule 1: An increase is recorded on the debit side and a decrease is recorded on

the credit side of all asset accounts.
Rule 2: An increase is recorded on the credit side and a decrease is recorded
on the debit side of all liability accounts
Rule 3: An increase is recorded on the credit side and a decrease is recorded
on the debit side of all equity accounts.
Rule 4: An increase is recorded on the debit side and a decrease is recorded on
the credit side of all asset accounts.
Rule 5: An increase is recorded on the credit side and a decrease is recorded
on the debit side of all revenue accounts.
Rule 6: An increase is recorded on the debit side and a decrease is recorded on
the credit side of all expense accounts.
Rule 7: If the normal balance of the contra account is debit, the increase will
be recorded on the debit side and the decrease will be recorded on the
credit side. If the normal balance of the contra account is credit, the
increase is recorded on the credit side and the decrease is recorded on
the debit side.

Below are complete business transactions of a service business happening in a

month period. Let us use the chart of accounts for a service business in chapter 3.

Illustration 7

BAA Accounting Firm, who is owned by Mr. Alabat, just opened its office in August
1, 2016 and has the following transactions during the month.

Date Business Transactions

August 1 The owner invested P300,000 cash to the business and hired staff.
August 2 Secured business permits to operate and paid P10,000 as fees.
August 3 Paid three months advanced rental for the office for P45,000 and
P30,000 as two months rental deposit.

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 Purchased furniture for P30,000 and air-conditioning unit for P20,000
cash.
Purchased supplies for P5,000 cash.
August 4 Billed JAD Company for audit conducted which is due on August 15
for P50,000.
Purchased computer units for P50,000 and printer for P5,000 with
terms of 30 days.
August 5 Provided accounting services to Equate Company for P10,000 cash.
August 6 Paid one year fire insurance premium for P5,000.
August 7 Purchased service vehicle costing P100,000 issuing a two-year
promissory note with interest at 10% per annum.
August 8 Provided accounting services to Chase Company for P50,000 receiving
P20,000 cash downpayment and the balance payable on August 20.
August 9 Purchased a motorcycle as service vehicle messenger for P75,000 cash.
August 10 The proprietor incurred official gasoline expenses for P5,000 and was
reimbursed by the staff.
August 11 Rendered accounting services to a client for P50,000. The client issued
a 30-day promissory note with interest of 10% per annum
August 13 Collected the amount due from JAD Company
August 14 The staff incurred transportation expenses for P2,000.
August 15 Collected the balance from Chase Company
Paid salaries to staff for the period August 1-31 for P35,000
August 18 The messenger advanced P1,000 for personal use and promised to pay
on September.
August 20 Rendered accounting services to another client for P20,000 payable on
September 20.
August 21 The proprietor was reimbursed for representation expenses made with
a possible client for P3,000
August 28 Received telephone bills and recorded it as liability for P7,500
Received electricity bill and paid P10,300 in cash
August 29 Paid salaries to staff for the period August 16-31, as follows:

Gross Salary P35,000

Deductions:
Withholding tax payable 5,000
SSS Payable 1,000
PhilHealth payable 250

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 Pag-IBIG payable 200
Net cash payment P28,550

August 31 The proprietor withdraws cash for P10,000

Additional information:

1. Supplies consumed for the month is P2,000

2. The advance payment for rental, payment for insurance premium and
purchase of supplies are initially recorded using the asset method
3. An advertising expense was incurred in August 31 but payment was made
to supplier on Sept 2 for P5,000
4. An accounting service was made to a customer in August 31 for P20,000 but
only billed by the staff to the customer on September 5
5. The depreciation of assets purchased are as follows:

Purchased Date Asset Cost Salvaged Value Life

Aug 3 Furnitures P30,000 P500 3 years
Aug 3 Aircon P20,000 P1.000 3 years
Aug 4 Computers P50,000 P2.000 3 years
Aug 4 Printers P5,000 P500 3 years
Aug 4 Vehicle P100,000 P10,000 5 years
Aug 4 Motor P75,000 P5,000 5 years

6. Compute interest expense on promissory note issued in Aug 7 for the

purchase of service vehicle at 10% per annum, P100,000 90-day note.
7. Compute interest receivable issued by a customer in Aug 11 at 10% per
annum, P50,000 30-day note.

Requirements:

a. Record the transactions to the general journal

b. Post to the journal entries to the general ledger
c. Prepare trial balance
d. Prepare journal entries
e. Prepare worksheet
f. Prepare the basic financial statements and closing entries

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 Recording of Business Transactions to the General Journal:

Company Name: BAA ACCOUNTING FIRM Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
Aug 1 Cash 100-01 300000
Mr. Alabat Capital 300 300000
To record initial investment of the
owner to the business

2 Taxes and Licenses 500-02 10000

Cash 100-01 10000
To record licensing fees

3 Prepaid Rent 100-08 45000

Rental Deposit 101-08 30000
Cash 100-01 75000
To record three months advanced rent
& two months rental deposit

3 Furniture and Fixtures 101-04 30000

Office Equipment 101-01 20000
Cash 50000
To record purchases of furnitures and
airconditioning unit

3 Office Supplies 100-06 5000

Cash 100-01 5000
To record purhcases of supplies

4 Accounts Receivable 100-03 50000

Service Revenue 400-01 50000
To record audit service to Jad Co.
payable on Aug 15

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 Company Name: BAA ACCOUNTING FIRM Page No. 02
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
Aug 4 Office Equipment 101-01 55000
Accounts Payable 200-01 55000
To record purchases of computer and
printer units, 30 days term

5 Cash 100-01 10000

Service Revenue 400-01 10000
To record acctg services to Equate Co.

6 Prepaid Insurance 100-07 5000

Cash 100-01 5000
To record one year fire insurance
premium

7 Service Vehicle 101-07 100000

Notes Payable 200-08 100000
To record purchase of vehicle issuing
a 90-day PN

8 Cash 100-01 20000

Accounts Receivable 100-03 30000
Service Revenue 400-01 50000
To record acctg services to Chase Co.
with cash DP and balance on Aug 20

9 Service Vehicle 101-07 75000

Cash 100-01 75000
To record purchase of motorcycle

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 Company Name: BAA ACCOUNTING FIRM Page No. 03
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
Aug 10 Gasoline Expenses 500-08 5000
Cash 100-01 5000
To record reimbursement to owner

11 Notes Receivable 100-04 50000

Service Revenue 400-01 50000
To record acctg services to a client
who issues a 30-day PN

13 Cash 100-01 50000

Accounts Receivable 100-03 50000
To record collection from JAD Co,

14 Transportation Expenses 500-14 2000

Cash 100-01 2000
To record expenses incurred by staff

15 Cash 100-01 30000

Accounts Receivable 100-03 30000
To record collection from Chase Co.

15 Salaries, wages & benefits 500-07 35000

Cash 100-01 35000
To record salaries for Aug 1-15

18 Advances to employees 100-05 1000

Cash 100-01 1000
To record cash advance of messenger

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 Company Name: BAA ACCOUNTING FIRM Page No. 04
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
Aug 20 Accounts Receivable 100-03 20000
Service Revenue 400-01 20000
To record acctg services to a client
to be paid on Sept 20

21 Representation Expenses 500-10 3000

Cash 100-01 3000
To record reimbursement to owner

28 Communication Expense 500-13 7500

Accounts Payable 200-01 7500
To record telephone bill on account

28 Light and Water 500-05 10300

Cash 100-01 10300
To record payment of electricity bill

29 Salaries, wages & benefits 500-07 35000

Withholding Tax Payable 200-03 5000
SSS Payable 200-04 1000
Philhealth Payable 200-05 250
Pag-ibig Payable 200-06 200
Cash 100-01 28550
To record salaries for Aug 16-31

31 Mr. Alabat Drawings 301 10000

Cash 100-01 10000
To record owner's drawings

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 Posting of Journal Entries to the General Ledger

COMPANY'S NAME: BAA ACCOUNTING FIRM GENERAL LEDGER

Account Title: CASH Account No. 100-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 1 Owners investment GJ1 300000
2 Payment of licence fees GJ1 1000 0
3 Rental payment GJ1 7500 0
3 Purchase of assets GJ1 5000 0
3 Purchase of supplies GJ1 500 0
5 Acctg services GJ2 10000
6 Fire insurance GJ2 5000
8 Acctg services GJ2 20000
9 Purchase of vehicle GJ2 75000
10 Gas expenses GJ3 5000
13 Collection from JAD GJ3 50000
14 Transporation expenses GJ3 2000
15 Collection from Chase GJ3 30000
15 Salaries of employees GJ3 35 0 0 0
18 Advances to employee GJ3 1 0 0 0
21 Representation GJ4 3 0 0 0
28 Electricity bill GJ4 10 3 0 0
29 Salaries of employees GJ4 28 5 5 0
31 Owner's drawings GJ4 10 0 0 0 95150

Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 4 JAD Co. GJ1 50000
8 Chase Co. GJ2 30000
13 Collection from JAD GJ3 50000
15 Collection from Chase GJ3 30000
20 For collection Sept 20 GJ4 20000 20000

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 Account Title: NOTES RECEIVABLE Account No. 100-04

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 11 Acctg services, 30-day PNGJ3 50000 50000

Account Title: ADVANCES TO EMPLOYEES Account No. 100-05

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 18 Messenger advances GJ3 1000 1000

Account Title: OFFICE SUPPLIES Account No. 100-06

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 3 Cash purchases GJ1 5000 5000

Account Title: PREPAID INSURANCE Account No. 100-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 6 One yr fire insurance GJ2 5000 5000

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 Account Title: PREPAID RENT Account No. 100-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 3 Three months advance GJ1 45000 45000

Account Title: OFFICE EQUIPMENT Account No. 101-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 3 Aircon unit GJ1 20000
4 Computer & printer GJ2 55000 75000

Account Title: FURNITURE & FIXTURES Account No. 101-04

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 3 Purchase in cash GJ1 30000 30000

Account Title: SERVICE VEHICLE Account No. 101-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 7 2-year PN GJ2 100000
9 Motorcycle in cash GJ2 75000 175000

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 Account Title: RENTAL DEPOSIT Account No. 101-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 3 Three months deposit GJ1 30000 30000

Account Title: ACCOUNTS PAYABLE Account No. 200-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 4 Computers & printers GJ2 55000
28 Telephone bill GJ4 7500 ( 62500)

Account Title: WITHHOLDING TAX PAYABLE Account No. 200-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 29 Salaries Aug 16-31 GJ4 5000 ( 5000)

Account Title: SSS PAYABLE Account No. 200-04

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 29 Salaries Aug 16-31 GJ4 1000 ( 1000)

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 Account Title: PHILHEALTH PAYABLE Account No. 200-05

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 29 Salaries Aug 16-31 GJ4 250 ( 250)

Account Title: PAG-IBIG PAYABLE Account No. 200-06

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 29 Salaries Aug 16-31 GJ4 200 ( 200)

Account Title: NOTES PAYABLE Account No. 200-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 7 Vehicle 2-year PN GJ2 100000 ( 100000)

Account Title: MR. ALABAT CAPITAL Account No. 300

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 1 Owner's investment GJ1 300000 ( 300000)

Account Title: MR. ALABAT DRAWINGS Account No. 301

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 31 Owner's cash drawings GJ4 10000 10000

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 Account Title: SERVICE REVENUE Account No. 400-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 4 Services on account GJ1 50000
5 Cash services GJ2 10000
8 Services on cash/account GJ2 50000
11 with 30-day PN GJ3 50000
20 Services on account GJ4 20000 ( 180000)

Account Title: TAXES & LICENCES Account No. 500-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 2 Licensing fees GJ1 10000 10000

Account Title: LIGHT & WATER Account No. 500-05

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 28 Electricity bill GJ4 10300 10300

Account Title: SALARIES, WAGES & BENEFITS Account No. 500-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 15 Salaries Aug 1-15 GJ3 35000
29 Salaries Aug 16-31 GJ4 35000 70000

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 Account Title: GASOLINE EXPENSES Account No. 500-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 10 Reimb to owner GJ3 5000 5000

Account Title: REPRESENTATION EXPENSE Account No. 500-10

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 21 Owner's reimbursement GJ4 3000 3000

Account Title: COMMUNICATION EXPENSES Account No. 500-13

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 28 Telephone bill GJ4 7500 7500

Account Title: TRANSPORTATION EXPENSES Account No. 500-14

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Aug 14 Staff expenses GJ3 2000 2000

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 Trial Balance

BAA ACCOUNTING FIRM

Trial Balance
August 31,2016
Debit Credit
Cash 95,150.00
Accounts receivable 20,000.00
Notes receivable 50,000.00
Advances to employees 1,000.00
Office supplies 5,000.00
Prepaid insurance 5,000.00
Prepaid rent 45,000.00
Office equipment 75,000.00
Furniture & fixtures 30,000.00
Service vehicle 175,000.00
Rental deposit 30,000.00
Accounts payable 62,500.00
Withholding tax payable 5,000.00
SSS payable 1,000.00
Philhealth payable 250.00
Pag-ibig payable 200.00
Notes payable 100,000.00
Mr. Alabat Capital 300,000.00
Mr. Alabat Drawings 10,000.00
Service revenue 180,000.00
Taxes and licenses 10,000.00
Light and water expense 10,300.00
Salaries, wages & benefits 70,000.00
Gasoline expenses 5,000.00
Representation expenses 3,000.00
Communication expenses 7,500.00
Transportation expenses 2,000.00
648,950.00 648,950.00

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FABM Revised.indd 251
Preparation of Worksheet

BAA ACCOUNTING FIRM

Worksheet
August 31,2016
Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 95,150.00 95,150.00 95,150.00
Accounts receivable 20,000.00 e) 20,000.00 40,000.00 40,000.00
Notes receivable 50,000.00 50,000.00 50,000.00
Advances to employees 1,000.00 1,000.00 1,000.00
Office supplies 5,000.00 a) 2,000.00 3,000.00 3,000.00
Prepaid insurance 5,000.00 c) 416.67 4,583.33 4,583.33
Prepaid rent 45,000.00 b) 15,000.00 30,000.00 30,000.00
Office equipment 75,000.00 75,000.00 75,000.00
Furniture & fixtures 30,000.00 30,000.00 30,000.00
Service vehicle 175,000.00 175,000.00 175,000.00
Rental deposit 30,000.00 30,000.00 30,000.00
Accounts payable 62,500.00 62,500.00 62,500.00
Withholding tax payable 5,000.00 5,000.00 5,000.00
SSS payable 1,000.00 1,000.00 1,000.00
Philhealth payable 250.00 250.00 250.00
Pag-ibig payable 200.00 200.00 200.00
Notes payable 100,000.00 100,000.00 100,000.00
Mr. Alabat Capital 300,000.00 300,000.00 300,000.00
Mr. Alabat Drawings 10,000.00 10,000.00 10,000.00
Service revenue 180,000.00 e) 20,000.00 200,000.00 200,000.00
Taxes and licenses 10,000.00 10,000.00 10,000.00
Light and water expense 10,300.00 10,300.00 10,300.00
Salaries, wages & benefits 70,000.00 70,000.00 70,000.00
Gasoline expenses 5,000.00 5,000.00 5,000.00
Representation expenses 3,000.00 3,000.00 3,000.00
Communication expenses 7,500.00 7,500.00 7,500.00
Transportation expenses 2,000.00 2,000.00 2,000.00
648,950.00 648,950.00

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FABM Revised.indd 252
Supplies expense a) 2,000.00 2,000.00 2,000.00
Rent expense b) 15,000.00 15,000.00 15,000.00
Insurance expense c) 416.67 416.67 416.67
Advertising expense d) 5,000.00 5,000.00 5,000.00
Accrued expense payable d) 5,000.00 5,000.00 5,000.00
Interest expense f) 657.53 657.53 657.53
Accrued interest payable f) 657.53 657.53 657.53
Interest receivable g) 273.97 273.97 273.97
Interest income g) 273.97 273.97 273.97
Depreciation expense h) 4,901.83 4,901.83 4,901.83
Accumulated depreciation-SV h) 2,367.12 2,367.12 2,367.12
Accumulated depreciation-OE h) 1,780.37 1,780.37 1,780.37
Accumulated depreciation-F&F h) 754.34 754.34 754.34
48,250.00 48,250.00 679,783.33 679,783.33
135,776.03 200,273.97
Net income for the month 64,497.94 64,497.94
200,273.97 200,273.97 544,007.30 544,007.30

5/22/2017 10:42:48 AM
 Notes on the Worksheet preparation:

a. Prepare the unadjusted trial balance by posting the amounts from the balances
of the general ledger accounts to the first two columns of the worksheet. Foot
the debit and credit to ensure balance.
b. Prepare the adjusting entries and post these to the adjusting entries columns.
Foot the debit and credit columns.
c. Extend amounts to the adjusted trial balance by adding the debits of
unadjusted trial balance and debits of adjusting entries, then subtract the
credits of adjusting entries. The same process on the credits: add the credits of
unadjusted trial balance and credits of adjusting entries, then deduct the debits
of adjusting entries. Foot the debit and credit columnsExtend the nominal or
temporary accounts to the income statement and real or permanent accounts
to the balance sheet.
d. Foot the debit and credit of the income statement and compute the net income
or loss. If the credit is more than the debit, then it is a net income. If the debit is
more than the credit, then it is a net loss.
e. Extend the net income to the credit column of the balance sheet or debit
column if it is a loss; then foot if the columns have the sane totals.

Preparation of Adjusting Journal Entries with supporting computations:

ADJUSTING ENTRIES DEBIT CREDIT

a Suppplies expense 2,000.00

Office supplies 2,000.00
To record supplies used for the month

b Rent expense 15,000.00

Prepaid rent 15,000.00
To record rent expense for the month

c Insurance expense 416.67

Prepaid insurance 416.67
To record insurance expenses for the
month of August
(Commputation: P5,000/12mos = P416.67)

d Advertising expenses 5,000.00

Accrued expense payable 5,000.00
To record ads incurred in Aug 31 but
paid the following month

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 e Accounts receivable 20,000.00
Service revenue 20,000.00
To record acctg services incurred in
Aug 31 but billed on Sept 2

f Interest Expense 657.53

Accrued interest payable 657.53
To record interest for 2-year PN for
P100,000 @ 10% per annum
Computation:
P100,000 x 10%=P10,000/365days=P27.40/day
P27.40 x 24 days (Aug 7-31) = P657.53

g Interest Receivable 273.97

Interest Income 273.97
To record interest for 30-day PN for
P50,000 @ 10% per annum
Computation:
P50,000 x 10%=P5,000/365days = P13.70/day
P13.70 x 20 days (Aug 11-31) = P273.97

h Depreciation expense 4,901.83

Accumulated depreciation - SV 2,367.12
Accumulated depreciation - OE 1,780.37
Accumulated depreciation - F&F 754.34
To record depreciation expense for the
month of August.

Computation:
Salvaged Depreciation Per day Days Total
Cost Value Net Life per year (365 days) Used Depreciation
30,000 500 29,500 3 9,833.33 26.94 28 754.34 754.34
20,000 1,000 19,000 3 6,333.33 17.35 28 485.84
50,000 2,000 48,000 3 16,000.00 43.84 27 1,183.56
5,000 500 4,500 3 1,500.00 4.11 27 110.96 1,780.37
100,000 10,000 90,000 5 18,000.00 49.32 27 1,331.51
75,000 5,000 70,000 5 14,000.00 38.36 27 1,035.62 2,367.12
4,901.83

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 Preparation of Basic Financial Statements:

A. Statement of Income

BAA ACCOUNTING FIRM

Statement of Income
For the Month Ended August 31, 2016

Service Income 200,000.00

Less: Expenses
Taxes and licenses 10,000.00
Light and water expense 10,300.00
Salaries, wages & benefits 70,000.00
Gasoline expenses 5,000.00
Representation expenses 3,000.00
Communication expenses 7,500.00
Transportation expenses 2,000.00
Supplies expense 2,000.00
Rent expense 15,000.00
Insurance expense 416.67
Advertising expense 5,000.00
Depreciation expense 4,901.83 135,118.50
Net Income 64,881.50
Add (deduct): Other income/expenses
Interest Income 273.97
Interest Expense (657.53) (383.56)

Net Income for the month 64,497.94

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 B. Statement of Financial Position

BAA ACCOUNTING FIRM

Statement of Financial Position
As of August 31, 2016

ASSETS
Current Assets:
Cash 95,150.00
Accounts receivable 40,000.00
Notes receivable 50,000.00
Interest receivable 273.97
Advances to employees 1,000.00
Office supplies 3,000.00
Prepaid insurance 4,583.33
Prepaid rent 30,000.00
Total Current Assets 224,007.30
Non-current Assets:
Office equipment 75,000.00
Accumulated depreciation (1,780.37) 73,219.63
Furniture & fixtures 30,000.00
Accumulated depreciation (754.34) 29,245.66
Service vehicle 175,000.00
Accumulated depreciation (2,367.12) 172,632.88
Rental deposit 30,000.00
Total Non-Current Assets 305,098.17
Total Assets 529,105.47
LIABILITIES
Current Liabilities:
Accounts payable 62,500.00
Withholding tax payable 5,000.00
SSS payable 1,000.00
Philhealth payable 250.00
Pag-ibig payable 200.00
Accrued expense payable 5,000.00
Accrued interest payable 657.53
Total Current Liabilities 74,607.53
Non-current Liabilities:
Notes Payable 100,000.00
Total Liabilities 174,607.53
CAPITAL
Mr. Alabat Capital 354,497.94
Total Liabilities and Capital 529,105.47

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 C. Statement of Changes in Capital

BAA ACCOUNTING FIRM

Statement of Changes in Capital
For the Month Ended August 31, 2016

Original capital 300,000.00

Add (Deduct):
Additional investment -
Net income for the month 64,497.94
Drawings (10,000.00)
Net Increase (Decrease) in Capital 54,497.94
Total Capital, August 31 354,497.94

D. Statement of Cash Flows

BAA ACCOUNTING FIRM

Statement of Cash Flow
For the Month Ended August 31, 2016

Cash Flow from Operating Activities:

Cash received from customers 110,000.00
Cash paid for advances of employee (1,000.00)
Cash paid for rental (75,000.00)
Cash paid for salaries (63,550.00)
Cash paid for licences (10,000.00)
Cash paid for supplies (5,000.00)
Cash paid for fire insurance (5,000.00)
Cash paid for transportation (2,000.00)
Cash paid for gasoline (5,000.00)
Cash paid for representation (3,000.00)
Cash paid to light and water (10,300.00)
Net cash flow for operating activities (69,850.00)

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 Cash Flow from Investing Activities:
Cash paid for purchase of office assets (50,000.00)
Cash paid for purchase of vehicle (75,000.00)
Net cash flow for investing activities (125,000.00)
Cash Flow from Financing Activities:
Cash investment of owner 300,000.00
Cash withdrawal by owner (10,000.00)
Net cash flow from financing activities 290,000.00
Net Increase in Cash 95,150.00
Cash balance, beginning -
Cash Balance, end 95,150.00

The direct method of cash flow preparation is used in this illustration to give
details on the inflows and outflows of cash from the business.

The Closing Entries:

CLOSING ENTRIES DEBIT CREDIT

a Service Revenue 200,000.00
Interest income 273.97
Taxes and licenses 10,000.00
Light and water expense 10,300.00
Salaries, wages & benefits 70,000.00
Gasoline expenses 5,000.00
Representation expenses 3,000.00
Communication expenses 7,500.00
Transportation expenses 2,000.00
Supplies expense 2,000.00
Rent expense 15,000.00
Insurance expense 416.67
Advertising expense 5,000.00
Depreciation expense 4,901.83
Interest expense 657.53
Income Summary 64,497.94
To close revenue and expenses
to income summary

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 b Income Summary 64,497.94
Mr. Alabat Capital 64,497.94
To close income summary to
the capital account

c Mr. Alabat Capital 10,000.00

Mr. Alabat Drawings 10,000.00
To close drawing account to
the capital account.

The closing entries are only made for the nominal or temporary accounts.
These are closed to the capital account of the owner. These expenses are not anymore
carried over to the next accounting period.

The accounting period can be monthly, quarterly, or annually.

Take note that in the accounting equation, all revenues increases the capital
account and expenses decreases the capital account.

Only the real or permanent accounts are shown in the post-closing trial
balance and are carried over to the next accounting period as beginning balances.

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 The Post-Closing Trial Balance:

BAA ACCOUNTING FIRM

Post-Closing Trial Balance
August 31,2016

Debit Credit
Cash 95,150.00
Accounts receivable 40,000.00
Notes receivable 50,000.00
Interest receivable 273.97
Advances to employees 1,000.00
Office supplies 3,000.00
Prepaid insurance 4,583.33
Prepaid rent 30,000.00
Office equipment 75,000.00
Accumulated depreciation 1,780.37
Furniture & fixtures 30,000.00
Accumulated depreciation 754.34
Service vehicle 175,000.00
Accumulated depreciation 2,367.12
Rental deposit 30,000.00
Accounts payable 62,500.00
Withholding tax payable 5,000.00
SSS payable 1,000.00
Philhealth payable 250.00
Pag-ibig payable 200.00
Accrued expense payable 5,000.00
Accrued interest payable 657.53
Notes Payable 100,000.00
Mr. Alabat Capital 354,497.94
534,007.30 534,007.30

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 TEST MATERIAL 11-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Prepare the following: (1) Adjusting Journal Entries, (2) Worksheet, (3) Adjusted
Trial Balance.

ROEL'S CAR WASH

Trial Balance
December 31,2015
Debit Credit
Cash 129,300.00
Accounts receivable 30,000.00
Allowance for uncollectible accounts 3,000.00
Notes receivable 50,000.00
Supplies 4,250.00
Office equipment 25,600.00
Accumulated depreciation - OE 2,560.00
Land 200,000.00
Building 400,000.00
Accumulated depreciation - Bldg 40,000.00
Accounts payable 49,590.00
Notes payable 100,000.00
Unearned income 22,000.00
Roel Capital 300,000.00
Roel Drawings 35,000.00
Service revenue 500,000.00
Salaries, wages & benefits 60,000.00
Light and water expense 63,000.00
Communication expenses 15,000.00
Interest expense 5,000.00

TOTAL 1,017,150.00 1,017,150.00

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 Additional data:

1. An interest of P5,000 has accrued on the notes receivable.

2. The allowance for uncollectible accounts should be increase to P6,000.
3. Supplies on hand is P1,250.
4. Office equipment and building should be depreciated at 10%.
5. Accrued interest on notes payable is P4,000.
6. Unearned income has ending balance of P11,000.
7. Accrued salaries is P10,000.

Requirements:

a. Prepare adjusting journal entries.

b. Prepare worksheet.
c. Prepare adjusted trial balance.

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 Answer Sheet for Test Material 11-1

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 ROEL'S CAR WASH
Worksheet

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December 31,2015
Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

TOTAL

TOTAL

Net income for the month

TOTAL

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 Adjusted Trial Balance

ROEL'S CAR WASH

Adjusted Trial Balance
December 31,2015
Debit Credit

TOTAL

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 266

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 TEST MATERIAL 11-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Prepare the following: (1) Adjusting Journal Entries, (2) Worksheet, (3)
Statement of Income, (4) Statement of Financial Position, (5) Statement of Changes in Equity,
(6) Closing Entries, (7) Post-Closing Trial Balance.

SUNSTAR MOVIEHOUSE
Trial Balance
December 31,2015
Debit Credit
Cash 260,000.00
Supplies 12,000.00
Prepaid advertising 62,000.00
Prepaid rent 210,000.00
Building 900,000.00
Accumulated depreciation - Bldg 40,000.00
Office equipment 350,000.00
Accumulated depreciation - Bldg 35,000.00
Accounts payable 72,000.00
Notes payable 100,000.00
Karen Capital 650,000.00
Karen Drawings 75,000.00
Service revenue 1,500,000.00
Salaries, wages & benefits 295,000.00
Light and water expense 233,000.00
TOTAL 2,397,000.00 2,397,000.00

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 Additional information:

1. Advertising expense for the period is P35,000.

2. Rental expense for the land occupies is P75,000.
3. Depreciation expenses: building- P50,000, equipment- P35,000.
4. Accrued interest on notes payable is P10,000.
5. Unpaid salaries for the period is P25,000.

Requirements:

a. Prepare adjusting journal entries.

b. Prepare worksheet.
c. Prepare statement of income.
d. Prepare statement of financial position.
e. Prepare statement of changes in capital.
f. Prepare closing entries.
g. Prepare post-closing trial balance.

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 Answer Sheet for Test Material 11-2
Adjusting Entries

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 SUNSTAR MOVIEHOUSE

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Worksheet
December 31,2015
Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

TOTAL

TOTAL

Net income for the month

TOTAL

5/22/2017 10:42:50 AM
 SUNSTAR MOVIEHOUSE
Statement of Income
For the Year Ended December 31, 2015

SUNSTAR MOVIEHOUSE
Statement of Changes in Capital
For the Year Ended December 31, 2015

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 SUNSTAR MOVIEHOUSE
Statement of Financial Position
As of December 31, 2015

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 Closing Entries

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 Post-Closing Trial Balance

SUNSTAR MOVIEHOUSE
Post-Closing Trial Balance
December 31,2015

Debit Credit

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 TEST MATERIAL 11-3
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: The following account balances are listed in the trial balance of SARAP
CATERING SERVICES, which is owned by Apple U. Recososa.

SARAP CATERING SERVICES

Trial Balance
December 31,2015
Debit Credit
Cash 326,460.00
Accounts receivable 95,000.00
Allowance for uncollectible accounts 1,500.00
Office supplies 5,500.00
Furniture and fixtures 56,200.00
Accumulated depreciation-F&F 2,810.00
Delivery vehicle 250,000.00
Accumulated depreciation-DV 12,500.00
Office equipment 55,000.00
Accumulated depreciation-OE 2,750.00
Catering equipment 150,000.00
Accumulated depreciation-SE 7,500.00
Accounts payable 103,400.00
Notes payable 100,000.00
Recososa Capital 200,000.00
Recososa Drawings 112,300.00
Service income 1,500,000.00
Salaries, wages & benefits 210,000.00
Food supplies used 625,000.00
Insurance expense 35,000.00
Interest expense 10,000.00
TOTAL 1,930,460.00 1,930,460.00

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 Additional information:

1. The allowance for uncollectible accounts should be increase by 10% of

accounts receivable.
2. Office supplies on hand is P2,300.
3. Fixed assets should be depreciated at 10% per annum. The accumulated
depreciation of furniture, office equipment, catering equipment represent 6
months only.
4. Accrued interest on notes payable is P5,000.
5. Accrued salaries is P 25,000.
6. Insurance expense account is a five year policy paid on Jan 1, 2015.
7. Food supplies unused is P20,000.

Requirements:

1. Prepare adjusting journal entries.

2. Prepare worksheet.
3. Prepare statement of income.
4. Prepare statement of financial position.
5. Prepare statement of changes in capital.
6. Prepare closing entries.
7. Prepare post-closing trial balance.

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 Answer Sheet for Test Material 11-3
Adjusting Entries

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 SARAP CATERING SERVICES
Worksheet

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December 31,2015
Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

TOTAL

TOTAL

Net income for the month

TOTAL

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 SARAP CATERING SERVICES
Statement of Income
For the Year Ended December 31, 2015

SARAP CATERING SERVICES

Statement of Changes in Capital
For the Year Ended December 31, 2015

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 SARAP CATERING SERVICES
Statement of Financial Position
As of December 31, 2015

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 Closing Entries

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

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 Post-Closing Trial Balance

SARAP CATERING SERVICES

Post-Closing Trial Balance
December 31,2015

Debit Credit

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 CHAPTER

12
THE ACCOUNTING CYCLE OF A
MERCHANDISING BUSINESS

LEARNING OBJECTIVES

At the end of the chapter, students are expected to:

☞ Record business transaction of merchandising business
to different journals;
☞ Learn new accounts for merchandising business which
are different from a service business;
☞ Post journal entries to the general and subsidiary
ledgers;
☞ Be able to prepare the following for a service business:
a. Trial balance.
b. Worksheet and adjusting entries.
c. Different financial statements.
d. Closing entries.
e. Post-closing trial balance.

The Merchandising Business is a bit complicated in recording and analyzing the

business transactions. This is because there are special transactions pertaining to sales
and cost of sales that require analysis, adjustments and computations. The treatment
of expenses is the same as the service business.
As presented in chapter 5, the format of a merchandising business is different
in terms of the statement of income. It contains three parts: (1) the sales including
returns and discounts, (2) the cost of sales, and (3) the expenses (the expenses are
even categorized into major groups but this will be discussed on higher accounting
subjects).

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 The revenue is termed as sales in merchandising business and the cost of the
revenue to sell is termed as cost of sales or cost of goods sold.
As merchandising business buys products from suppliers or manufacturers
and sells these products to consumers with mark-up or profit without changing the
form, the buying of the products which is termed as purchases will become the cost
of the products including freight expenses. Thus, the business maintains inventory
account for sale.
The recording of transactions is also different from a service business as the
merchandising business maintains sets of special journals. These special journals are
the (1) sales journal, (2) purchase journal, (3) receipt journal, (4) disbursement journal,
and (5) general journal.
This business also uses new accounts that are different from a service business.
These are the following:
a. Sales – these are amounts earned for the sale of goods or merchandises to
customers, either in cash or on account.
b. Sales returns & allowances – these represent goods or merchandises that are
returned by customers due to defect or for some other reasons.
c. Sales discounts- these are discounts extended to customers by either buying in
bulk or by being loyal to the business.
d. Freight out - these are expenses incurred by the seller in the delivery of goods
to the customers.
e. Merchandise inventory - these are goods/products that are kept in a warehouse
for sale or unsold items in the store.
f. Purchases- this account is used for various purchases of goods or merchandises
that are intended for sale.
g. VAT input tax- these are taxes being passed on by the seller to the buyer in the
purchase of goods and services and are treated as credits or deductions from
the payment of VAT payable on sales.
h. Purchase returns & allowances - this account is used for goods or merchandises
that are returned to the suppliers for various reasons, like defect.
i. Purchase discounts - these are discounts extended by the suppliers by either
buying in bulk or being loyal to the products of the suppliers.
j. Freight in - this account is an inventoriable cost, which means that it will
become part of the cost of the products/goods being purchased. These are
expenses paid in the delivery of the goods being shouldered by the buyer.

The Inventory System

The merchandising business purchases goods or merchandises intended for
sale with a mark-up; thus the business requires to maintain inventory of goods or
merchandises.

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 There are two systems that a merchandising business follows in the recording
of inventory transactions. These are:
1. Perpetual inventory system - under this system, the business maintains a
running record of inventory account and cost of sales account. This system
achieves control over expensive goods such as jewelry, furniture, computers
or appliances and automobile.
In perpetual system, purchase of inventory is recorded by debiting the
inventory account. To record sales, two entries are needed. The first entry is to
record the sale in the usual manner – debit Cash or Accounts Receivable and
credit Sales for the sale price of the goods. The second entry is to debit Cost of
Goods Sold and to Credit Inventory for cost. This entry serves to keep an up-
to-date record of the cost of inventory on hand. The inventory account and the
cost of sales account carry an up-to-date balance throughout the period.

Pro-forma entries are:

Debit Credit
Upon purchase of goods
Merchandise inventory 000
Cash or Accts Payable 000

Upon sale of goods

Cash or Accts Receivable 000
Sales 000
Cost of sales 000
Merchandise inventory 000
2. Periodic inventory system - in periodic system, purchases of inventory are
recorded Purchases. Sales are recorded as usual - debit Cash or Accounts
Receivable and credit Sales. And there is no need to record cost of sales and
inventory. Throughout the period, the inventory account carries the beginning
balance left over from the end of the preceding period. At the end of the
period, an inventory physical count should be carried out to determine the
actual inventory on hand and calculate cost of sales accordingly. An entry will
be needed to clear the Purchases accounts and setup the Inventory balance.

Pro-forma entries are:

Debit Credit
Upon purchase of goods
Purchases 000
Freight in 000
Cash or Accts payable 000

Upon closing the purchase accounts and beginning inventory account to income
summary

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 Income summary 000
Purchases 000
Freight in 000
Merchandise inventory, beg 000

The adjusting entry to set-up the ending inventory will be:

Merchandise inventory, end 000
Income summary 000

Below are one-month business transactions of a merchandising business. Let

us use the chart of accounts for a merchandising business in chapter 3 to go through
with the accounting cycle.

Illustration 8
Quick Merchandising company has started its merchandising business in
September 1, 2016. The business is owned by Ms. Luz Ebona who made the following
investments:
Cash P 400,000
Store supplies 20,000
Delivery Vehicle 300,000
Office equipment 100,000
The following are sales and purchases transactions made by Quick
Merchandising for the month of Sept, 2016. The sales and purchases are subject to
12% VAT. The store follows the periodic inventory system.

Date Transactions
Sept 4 Purchased merchandise in cash from Yu Trading, broken down as
follows:
Purchase cost P60,000
12% VAT 7,200
Total invoice cost P67,200
Freight of P1,000 was paid by Quick Merchandising.

Sept 5 Returned merchandise to Yu Trading due to defective quality,

purchase cost is P1,000, 12% vat is P120.
Sept 6 Sold merchandise for cash to Mr. Ayala, P10,000 + P1,200 12% vat, for
total invoice price of P11,200.
Sept 7 Mr. Ayala returned merchandise due to defect, P2,000 + P240 12% vat,
for a total of P2,240

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 Sept 7 Purchased merchandise on account from Yu Trading amounting to
P50,000 plus 12% of P6,000 for a total of P56,000. The delivery cost was
shouldered by Yu Trading.
Sept 9 Sold merchandise on account to ABC Company with total invoice price
of P22,400. The 12% vat is included in the invoice price The freight of
P500 was paid by Quick Merchandising.
Sept 11 Partially paid the merchandise purchased from Yu Trading for P30,000.
Sept 13 Purchased merchandise on account from Zet Merchandising for a total
invoice price of P39,200. The 12% VAT is already included in the invoice
price. The freight cost is P1,500 but was paid by Zet Merchandising.
Sept 15 Purchase merchandise for cash for P18,000 plus 12% vat of P2,160.
Freight cost of P500 was shouldered by Quick Merchandising.
Sept 16 Sold merchandise for cash to a loyal customer for P15,000 and discount
of P1,000 plus 12% vat of P1,680. The vat is computed based on the
amount after the discount.
Sept 18 Received partial payment from ABC Company for P10,000.
Sept 21 Paid in full the account due to Yu Trading.

Sept 24 Purchased merchandise from Tan Trading on account for P35,000 plus
12% VAT, for a total of P39,200. Freight is P2,500 which was shouldered
by Quick Merchandising.
Sept 28 Sold merchandise on account to DEF Company for P67,200 which is
inclusive of 12% VAT.
Sept 28 Sold merchandise for cash to a customer for P89,200 inclusive of 12%
vat.
Sept 29 Purchased merchandise for cash from Tan Trading with a total invoice
price of P13,440, inclusive of 12% VAT.
Sept 30 Quick Merchandising conducted physical inventory count of unsold
merchandises and the amount is P115,000.

Requirements:
a. Journalize the transactions using the special journals
b. Posts journal entries to general ledgers and subsidiary ledgers
c. Prepare trial balance
d. Prepare the statement of cost of sales

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 Journalizing of transactions to:

Sales Journal

QUICK MERCHANDISING
Sales Journal
September 30,2016

ACCTS RECEIVALBE SALES VAT PAYABLE

DATE Paticulars Ref No. DEBIT CREDIT CREDIT
2016
Sept 9 ABC COMPANY 22400 20000 2400
28 DEF COMPANY 67200 60000 7200

TOTAL 89600 80000 9600

Purchase Journal

QUICK MERCHANDISING
Purchase Journal
September 30,2016

PURCHASES VAT INPUT ACCTS PAYABLE

DATE Paticulars Ref No. DEBIT DEBIT CREDIT
2016
Sept 7 YU TRADING 50000 6000 56000
13 ZET MERCHANDISING 35000 4200 39200
24 TAN TRADING 35000 4200 39200

TOTAL 120000 14400 134400

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 Disbursement Journal

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QUICK MERCHANDISING
Disbursement Journal
September 30,2016

Ref CASH PURCHASES ACCTS PAYABLE VAT INPUT SUNDRY ACCOUNTS

DATE Paticulars No. CREDIT DEBIT DEBIT DEBIT ACCOUNT NAME DEBIT CREDIT
2016
Sept 4 YU TRADING 67200 60000 7200
TRUCKING COMPANY 1000 Freight in 100 0
7 MR. AYALA 2240 Sales returns 200 0
VAT payable 24 0
9 TRUCKING COMPANY 5 0 0 Freight out 50 0
11 YU TRADING 30 0 0 0 30000
15 PURCHASES FROM SUPPLIER 20 1 6 0 18000 2160
TRUCKING COMPANY 5 0 0 Freight in 500
21 YU TRADING 26 0 0 0 26000
24 TRUCKING COMPANY 2 5 0 0 Freight out 2500
29 TAN TRADING 13 4 4 0 12000 1440

TOTAL 163540 90000 56000 10800 6740

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 Receipt Journal

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QUICK MERCHANDISING
Receipts Journal
September 30,2016

Ref CASH SALES ACCTS RECEIVABLE VAT PAYABLE SUNDRIES

DATE Paticulars No, DEBIT CREDIT CREDIT CREDIT ACCOUNT NAME DEBIT CREDIT
2016
Sept 1 Initial investment from owner 400000 Luz Ebona Capital 400000
5 Reimbursement of returned goods 1120 Purchase returns 1000
VAT input tax 120
6 Cash sales- Mr. Ayala 11200 10000 1200
16 Cash sales to a loyal customer 15680 15000 1 6 8 0 Sales discount 1000
18 Collection from ABC Company 10000 10000
28 Cash sales 89600 80000 9600

TOTAL 527600 105000 10000 12480 1000 401120

5/22/2017 10:42:52 AM
 General Journal

Company Name: QUICK MERCHANDISING Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
Sept 1 Store supplies 100-08 20000
Delivery vehicle 101-02 300000
Office equipment 101-01 100000
Luz Ebona Capital 300 420000
To record initial capital investment
of Luz Ebona to the business

Posting of Journal Entries to:

General Ledger

COMPANY'S NAME: QUICK MERCHANDISING GENERAL LEDGER

Account Title: CASH Account No. 100-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 1 Owners investment RJ1 400000
4 Purhases in cash DJ1 67200
Delivery charges-purc DJ1 1000
5 Return of purchases RJ1 1120
6 Cash sales to Mr, Ayala RJ1 11200
7 Return of sales DJ1 22 4 0
9 Delivery charges-sales DJ1 5 0 0
11 Payment to Yu Trading DJ1 300 0 0
15 Cash purchases DJ1 201 6 0
Delivery charges DJ1 5 0 0
16 Cash sales RJ1 15680
18 Collection from ABC Co. RJ1 10000
21 Full paymt to Yu Trading DJ1 26000
24 Delivery charges DJ1 2500
28 Cash sales RJ1 89600
29 Cash purchases DJ1 13440 274460

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 Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 9 ABC Company SJ1 22400
18 Collection from ABC Co. RJ1 10000
28 DEF Company SJ1 67200 79600

Account Title: STORE SUPPLIES Account No. 100-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 1 Initial investment GJ1 20000 20000

Account Title: VAT INPUT TAX Account No. 100-13

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 4 Purchase in cash DJ1 7200
5 Return of purchases RJ1 120
7 Purchases on account PJ1 6000
13 Purchases on account PJ1 4200
15 Cash purchases DJ1 2160
24 Purchases on account PJ1 4200
29 Cash purchases DJ1 1440 25080

Account Title: OFFICE EQUIPMENT Account No. 101-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 1 Initial investment GJ1 100000 100000

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 Account Title: DELIVERY VEHICLE Account No. 101-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 1 Initial investment GJ1 300000 300000

Account Title: ACCOUNTS PAYABLE Account No. 200-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 7 Yu Trading PJ1 56000
11 Paymt to Yu Trading DJ1 30000
13 Zet Merchandising PJ1 39200
21 Full paymt to Yu Trading DJ1 26000
24 Tan Trading PJ1 39200 ( 78400)

Account Title: VAT PAYABLE Account No. 200-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 6 Cash sales RJ1 1200
7 Return sales DJ1 240
9 Sales on account SJ1 2400
16 Cash sales RJ1 1680
28 Sales on account SJ1 7200
28 Cash sales RJ1 9600 ( 21840)

Account Title: LUZ EBONA CAPITAL Account No. 300

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 1 Owner's investment GJ1 820000 ( 820000)

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 Account Title: SALES Account No. 400-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 6 Cash sales to Mr. Ayala RJ1 1 0 0 0 0
9 Sales on acct to ABC Co. SJ1 2 0 0 0 0
16 Cash sales RJ1 1 5 0 0 0
28 Sales on acct to DEF Co. SJ1 6 0 0 0 0
28 Cash sales RJ1 8 0 0 0 0 ( 185000)

Account Title: SALES RETURNS & ALLOWANCES Account No. 400-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 7 Return of sales DJ1 2000 2000

Account Title: SALES DISCOUNT Account No. 400-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 16 Cash sales to loyal cust RJ1 1000 1000

Account Title: PURCHASES Account No. 500-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 4 Purchases for cash DJ1 60000
7 On acct from Yu Trading PJ1 50000
13 On acct from Zet Mdsing PJ1 35000
15 Cash purchases DJ1 18000
24 On acct Tan Trading PJ1 35000
29 Cash purchases DJ1 12000 210000

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 Account Title: PURCHASE RETURNS & ALLOWANCES Account No. 500-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 5 Returns of purchases RJ1 1000 ( 1000)

Account Title: FREIGHT IN Account No. 500-04

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 4 Delivery charges DJ1 1000
15 Delivery charges DJ1 500
24 Delivery charges DJ1 2500 4000

Account Title: FREIGHT OUT Account No. 600-15

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016
Sept 9 Delivery charges DJ1 500 500

Subsidiary Ledger

SUBISDIARY LEDGER
SUBSIDIARY LEDGER
NAME: ABC COMPANY Account Title: Accounts Receivable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

2016
Sept 9 Sale of goods 22400
18 Payment of account 10000 12400

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 NAME: DEF COMPANY Account Title: Accounts Receivable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

2015
Sept 28 Sale of goods 6 7 2 0 0 6 7 2 0 0

NAME: YU TRADING Account Title: Accounts Payable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

Sept 7 Purhases of goods 56000
11 Partial payment 30000 26000
21 Full payment 26000

NAME: ZET MERCHANDISING Account Title: Accounts Payable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

Sept 13 Purchases of goods 39200 39200

NAME: TAN TRADING Account Title: Accounts Payable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

Sept 24 Purchases of goods 39200 39200

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 Trial Balance
QUICK MERCHANDISING
Trial Balance
September 30,2016
Debit Credit
Cash 364,060.00
Accounts receivable 79,600.00
Store supplies 20,000.00
VAT input tax 25,080.00
Office equipment 100,000.00
Delivery vehicle 300,000.00
Accounts payable 78,400.00
Vat payable 21,840.00
Luz Ebona Capital 820,000.00
Sales 185,000.00
Sales returns & allowances 2,000.00
Sales discount 1,000.00
Purchases 210,000.00
Purchase returns 1,000.00
Freight in 4,000.00
Freight out 500.00
1,106,240.00 1,106,240.00

Statement of Cost of Sales

QUICK MERCHANDISING
Statement of Cost of Sales
For the Month Ended September 30,2016

Purchases 210,000
Freight In 4,000
Total Purchases 214,000
Less: Purchase Returns 1,000

Total Goods Available for Sale 213,000

Less: Merchandise Inventory, end 115,000

Cost of Sales 98,000

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 To complete the Accounting Cycle of a Merchandising Business, let us take
the following illustration:

Illustration 9
Below is the trial balance of Jeric Merchandising as of December 31, 2016. The
proprietor started operating its business in January 1, 2016. The business follows the
periodic system of inventory.

JERIC MERCHANDISING
Trial Balance
December 31,2016

Debit Credit
Cash 275,000.00
Accounts receivable 450,000.00
Allowance for uncollectible accounts 35,450.00
Merchandise inventory, Jan 1 75,000.00
Store supplies 54,100.00
Prepaid insurance 45,000.00
Prepaid rent 60,000.00
Office equipment 100,000.00
Accumulated deprecition-OE 13,333.00
Furniture & fixtures 25,000.00
Accumulated deprecition-F&F 4,000.00
Delivery Vehicle 250,000.00
Accumulated deprecition-DV 23,000.00
Accounts payable 115,300.00
Jeric Capital 1,000,000.00
Jeric Drawing 100,000.00
Sales 2,200,000.00
Sales returns & allowances 56,500.00
Sales discounts 24,000.00
Purchases 1,200,000.00
Purchase returns & allowances 350,000.00
Purchase discounts 150,000.00
Freight in 75,000.00
Freight out 65,000.00
Salaries, wages & benefirs 147,000.00
Sales commissions 322,150.00
Depreciation expenses 40,333.00
Rent expense 60,000.00
Light and water 467,000.00
3,891,083.00 3,891,083.00
-

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 The following are additional information:
1. Merchandise inventory end is P 325,000.00.
2. Store supplies on hand - P25,000.00 ..
3. The prepaid insurance was paid in April for 1 year fire insurance premium
4. Unpaid telephone bills is P10,000.00.
5. Depreciation expense is only for six months. Depreciation per month as
follows;
Office equipment P 2,222.22
Furniture P 666.67
Delivery Vehicle P 3,833.33

6. Prepaid rent was charged to expense at P10,000 per month for Jan to June,
2016.
7. Allowance for uncollectible accounts is based on Accts receivable balance at
10%.

Requirements:
a. Prepare adjusting journal entries.
b. Prepare worksheet.
c. Prepare financial statements.
d. Prepare and journalize closing entries.
e. Prepare post-closing trial balance.

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 Adjusting entries:

ADJUSTING ENTRIES DEBIT CREDIT

a Store supplies expense 29,100.00

Store supplies 29,100.00
To record used supplies for the year

b Insurance expense 33,750.00

Prepaid insurance 33,750.00
To record insurance exp for Apr-Dec

c Communication expense 10,000.00

Accrued expense payable 10,000.00
To record unpaid telephone bills
d Depreciation expense 40,333.00
Accumulated depreciation-OE 13,333.00
Accumulated depreciation-F&F 4,000.00
Accumulated depreciation-DV 23,000.00
To record depreciation for Jul-Dec

e Rent expense 60,000.00

Prepaid rent 60,000.00
To record rent expense for July-Dec

f Uncollectible account expense 9,550.00

Allowance for uncollectible account 9,550.00
To record allow for uncollectible account
as follows:
Accts receivable 450,000.00
Allowance rate 10%
Desiired allowance 45,000.00
Allowance balance (35,450.00)
Difference 9,550.00

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 Worksheet

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JERIC MERCHANDISING
Worksheet
August 31,2016
Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 275,000.00 275,000.00 275,000.00
Accounts receivable 450,000.00 450,000.00 450,000.00
Allowance for uncollectible accounts 35,450.00 f) 9,550.00 45,000.00 45,000.00
Merchandise inventory, Jan 1 75,000.00 75,000.00 75,000.00
Store supplies 54,100.00 a) 29,100.00 25,000.00 25,000.00
Prepaid insurance 45,000.00 b) 33,750.00 11,250.00 11,250.00
Prepaid rent 60,000.00 e) 60,000.00 - -
Office equipment 100,000.00 100,000.00 100,000.00
Accumulated deprecition-OE 13,333.00 d) 13,333.00 26,666.00 26,666.00
Furniture & fixtures 25,000.00 25,000.00 25,000.00
Accumulated deprecition-F&F 4,000.00 d) 4,000.00 8,000.00 8,000.00
Delivery Vehicle 250,000.00 250,000.00 250,000.00
Accumulated deprecition-DV 23,000.00 d) 23,000.00 46,000.00 46,000.00
Accounts payable 115,300.00 115,300.00 115,300.00
Jeric Capital 1,000,000.00 1,000,000.00 1,000,000.00
Jeric Drawing 100,000.00 100,000.00 100,000.00
Sales 2,200,000.00 2,200,000.00 2,200,000.00
Sales returns & allowances 56,500.00 56,500.00 56,500.00

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Sales discounts 24,000.00 24,000.00 24,000.00
Purchases 1,200,000.00 1,200,000.00 1,200,000.00
 Accounts payable 115,300.00 115,300.00 115,300.00
Jeric Capital 1,000,000.00 1,000,000.00 1,000,000.00
Jeric Drawing 100,000.00 100,000.00 100,000.00
Sales 2,200,000.00 2,200,000.00 2,200,000.00
Sales returns & allowances 56,500.00 56,500.00 56,500.00

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Sales discounts 24,000.00 24,000.00 24,000.00
Purchases 1,200,000.00 1,200,000.00 1,200,000.00
Purchase returns & allowances 350,000.00 350,000.00 350,000.00
Purchase discounts 150,000.00 150,000.00 150,000.00
Freight in 75,000.00 75,000.00 75,000.00
Freight out 65,000.00 65,000.00 65,000.00
Salaries, wages & benefirs 147,000.00 147,000.00 147,000.00
Sales commissions 322,150.00 322,150.00 322,150.00
Depreciation expenses 40,333.00 d) 40,333.00 80,666.00 80,666.00
Rent expense 60,000.00 e) 60,000.00 120,000.00 120,000.00
Light and water 467,000.00 467,000.00 467,000.00
3,891,083.00 3,891,083.00
Store supplies expense a) 29,100.00 29,100.00 29,100.00
Insurance expense b) 33,750.00 33,750.00 33,750.00
Communication expense c) 10,000.00 10,000.00 10,000.00
Accrued expense payable c) 10,000.00 10,000.00 10,000.00
Uncollectible account expense f) 9,550.00 9,550.00 9,550.00
Merchandise inventory, Dec 31 325,000.00 325,000.00
182,733.00 182,733.00 3,950,966.00 3,950,966.00
2,714,716.00 3,025,000.00
Net income for the month 310,284.00 310,284.00
3,025,000.00 3,025,000.00 1,561,250.00 1,561,250.00

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 Financial Statements

Statement of Income

JERIC MERCHANDISING
Statement of Income
For the Year Ended Dec 31, 2016

Gross Sales 2,200,000.00

Less: Sales returns & allowances 56,500.00
Sales discounts
Salels discounts 24,000.00 80,500.00
Net Sales 2,119,500.00
Deduct: Cost of Sales
Merchandise inventory, Jan 1 75,000.00
Add: Purchases 1,200,000.00
Freight in 75,000.00
Total 1,275,000.00
Less: Purchase returns (350,000.00)
Purchase discounts (150,000.00) 775,000.00
Total Goods Available for sale 850,000.00
Less: Merchandise inventory, Dec 31 325,000.00 525,000.00
Gross Profit 1,594,500.00
Less: Expenses
Freight out 65,000.00
Salaries, wages & benefirs 147,000.00
Sales commissions 322,150.00
Depreciation expenses 80,666.00
Rent expense 120,000.00
Light and water 467,000.00
Store supplies expense 29,100.00
Insurance expense 33,750.00
Communication expense 10,000.00
Uncollectible account expense 9,550.00 1,284,216.00
Net Income 310,284.00

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 Statement of Financial Position
JERIC MERCHANDISING
Statement of Financial Position
As of December 31, 2016

ASSETS
Current Assets:
Cash 275,000.00
Accounts receivable 450,000.00
Allowance for uncollecttible accounts (45,000.00) 405,000.00
Merchandise inventory, Dec 31 325,000.00
Store supplies 25,000.00
Prepaid insurance 11,250.00
Total Current Assets 1,041,250.00
Non-current Assets:
Office equipment 100,000.00
Accumulated depreciation (26,666.00) 73,334.00
Furniture & fixtures 25,000.00
Accumulated depreciation (8,000.00) 17,000.00
Delivery vehicle 250,000.00
Accumulated depreciation (46,000.00) 204,000.00
Total Non-Current Assets 294,334.00
Total Assets 1,335,584.00
LIABILITIES
Current Liabilities:
Accounts payable 115,300.00
Accrued expense payable 10,000.00
Total Current Liabilities 125,300.00
CAPITAL
Jeric Capital 1,210,284.00
Total Liabilities and Capital 1,335,584.00

Statement of Changes in Capital

JERIC MERCHANDISING
Statement of Changes in Capital
For the Year Ended Dec 31, 2016
Original capital 1,000,000.00
Add (Deduct):
Net income 310,284.00
Drawings (100,000.00)
Net Increase (Decrease) in Capital 210,284.00
Total Capital, August 31 1,210,284.00

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 Statement of Cash Flow (Indirect Mehod)

JERIC MERCHANDISING
STATEMENTS OF CASH FLOWS
For the Year Ended Dec 31, 2016

CASH FLOWS FROM OPERATING ACTIVITIES

Net income 310,284.00
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation expense 80,666.00
Changes in assets and liabilities- increase (decrease) in:
Accounts receivables (405,000.00)
Merchandise inventory (325,000.00)
Store Supplies (25,000.00)
Prepaid insurance (11,250.00)
Accounts payables 115,300.00
Accrued expense payable 10,000.00
Net cash used for operating activities (250,000.00)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of office equipment (100,000.00)
Purchase of furniture (25,000.00)
Purchase of delivery vehicle (250,000.00)
Net cash used for investing activities (375,000.00)

CASH FLOWS FROM FINANCING ACTIVITIES

Cash investment from owner 1,000,000.00
Cash withdrawal by owner (100,000.00)
Net cash provided by financing activities 900,000.00

NET INCREASE IN CASH 275,000.00

CASH, beginning -
CASH, end 275,000.00

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 Closing Entries
CLOSING ENTRIES DEBIT CREDIT
a). Sales 2,200,000.00
Purchase returns & allowances 350,000.00
Purchase discounts 150,000.00
Sales returns & allowances 56,500.00
Sales discounts 24,000.00
Purchases 1,200,000.00
Freight in 75,000.00
Freight out 65,000.00
Salaries, wages & benefirs 147,000.00
Sales commissions 322,150.00
Depreciation expenses 80,666.00
Rent expense 120,000.00
Light and water 467,000.00
Store supplies expense 29,100.00
Insurance expense 33,750.00
Communication expense 10,000.00
Uncollectible account expense 9,550.00
Income summary 60,284.00
To close revenue and expenses
to income summary account

b) Income summary 75,000.00

Merchandise inventory, Jan 1 75,000.00
To close beginning inventory to
income summary account
c). Merchandise inventory, Dec 31 325,000.00
Income summary 325,000.00
To close ending inventory to
income summary account

d). Income Summary 310,284.00

Jeric Capital 310,284.00
To close income summary to
the capital account

e). Jeric Capital 100,000.00

Jeric Drawings 100,000.00
To close drawing account to
the capital account.

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 Post-Closing Trial Balance
JERIC MERCHANDISING
Post-Closing Trial Balance
December 31,2016

Debit Credit
Cash 275,000.00
Accounts receivable 450,000.00
Allowance for uncollectible accounts 45,000.00
Merchandise inventory, Dec 31 325,000.00
Store supplies 25,000.00
Prepaid insurance 11,250.00
Office equipment 100,000.00
Accumulated deprecition-OE 26,666.00
Furniture & fixtures 25,000.00
Accumulated deprecition-F&F 8,000.00
Delivery Vehicle 250,000.00
Accumulated deprecition-DV 46,000.00
Accounts payable 115,300.00
Accrued expense payable 10,000.00
Jeric Capital 1,210,284.00
1,461,250.00 1,461,250.00

In the preparation of the worksheet, important process on the treatment of

inventories and net income shall be followed:
1. The inventory beginning should be extended to the debit side of the income
statement, which means that it is part of the cost of sales.
2. The inventory ending should be extended to the debit side of the balance
sheet and at the same time to the credit side of the income statement. This
means that it is a deduction of cost of sales and since these are unsold items,
these are considered as assets for sale in the future.
3. The net income, which is the excess of revenues over expenses, should be
extended to the debit side of the income statement and at the same time to
the credit side of the balance sheet as an addition to the capital.
If a loss is incurred, which is the excess of expenses over the revenues, the
loss is extended to the credit side of the income statement and at the same
time, to the debit side of the balance sheet as a deduction on the capital.
4. The net income or loss is then closed to the capital of the owner. The same
treatment to the drawing account.
5. All amounts in the balance sheet columns will now be picked up as the
amounts for the post-closing trial balance.

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 TEST MATERIAL 12-1
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Prepare the Cost of Sales Statement and Statement of Gross Income based on the
following information.

The following selected accounts are taken from the adjusted trial balance if
Joanna Trading for the period ended December 31, 2016:

Merchandise inventory, Jan 1 P 304,600

Merchandise inventory, Dec 31 600,250
Sales 2,560,500
Purchases 1,900,000
Sales returns & allowances 100,000
Purchase returns & allowances 76,000
Sales discounts 65,500
Purchase discounts 54,300
Freight in 12,200
Freight out 9,250
Joanna capital 1,500,000
Joanna drawings 150,000
Sales commissions 350,000

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 Answer Sheet for Test Material 12-1

JOANNA TRADING
Statement of Cost of Sales
For the Year Ended December 31,2016

JOANNA TRADING
Statement of Gross Income
For the Year Ended December 31,2016

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 TEST MATERIAL 12-2
NAME: DATE:
SECTION: SCORE: GRADE:

Instruction: Prepare statement of income based on the following information.

Selected general ledger account balances of Christy’s Wholesale Outlet for the
period ended December 31, 2016 are presented below:

Merchandise inventory, Dec 31 P 750,000

Merchandise inventory, Jan 1 235,300
Christy’s Capital 2,500.000
Christy’s drawings 200,000
Sales 3,550,000
Sales returns and allowances 125,000
Sales discounts 45,350
Purchases 1,325,000
Purchase returns and allowances 225,000
Purchase discounts 45,500
Freight in 20,000
Freight out 15,300
Salaries, wages and benefits 320,000
Sales commissions 125,000
Advertising expenses 51,000
Depreciation expenses 45,000
Light and water 22,000
Office supplies 15,150
Rent expense 225,000
Insurance expense 32,300

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 Answer Sheet for Test Material 12-2

CHRISTY'S WHOLESALE OUTLET

Statement of Income
For the Year Ended December 31, 2016

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 TEST MATERIAL 12-3
NAME: DATE:
SECTION: SCORE: GRADE:

All-in Trading has started its merchandising business in July 1, 2016. The
business is owned by Ms Cecilia Yu Mandap who made the following investments:

Cash P 800,000
Delivery Vehicle 500,000
Office equipment 300,000
Store supplies 140,000

The following are sales and purchases transactions made by All-in Trading for
the period July 1- 31, 2016. The sales and purchases are subject to 12% VAT. The store
follows the periodic inventory system.

Date Transactions

July 3 Purchased merchandise in cash from Christy’s Wholesale Outlet:

Purchase cost – P600,000, 12% vat- P72,000. Freight of P10,000 was
paid by All-in Trading.
July 4 Returned merchandise to Christy’s Wholesale Outlet due to
defective quality, purchase cost is P10,000, 12% vat is P1,200.
July 6 Sold merchandise for cash to Ms. Angeles, P100,000 + P12,000 12%
vat, for total invoice price of P112,000.
July 6 Ms. Angeles returned merchandise due to defect, P20,000 + P2,400
12% vat, for a total of P22,400.
July 7 Purchased merchandise on account from Christy’s Wholesale
Outlet amounting to P500,000 plus 12% of P60,000 for a total of
P560,000. The delivery cost was shouldered by Christy’s Wholesale
Outlet.
July 8 Sold merchandise on account to Chase Company with total invoice
price of P224,000. The 12% vat is included in the invoice price The
freight of P5,000 was paid by All-in Trading.
July 10 Partially paid the merchandise purchased from Christy’s Wholesale
Outlet for P300,000.

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 July 12 Purchased merchandise on account from Zia Manufacturing for a
total invoice price of P392,000. The 12% VAT is already included in
the invoice price. The freight cost is P15,000 but was paid by Zia
Manufacturing.
July 14 Sold merchandise for cash to a loyal customer for P150,000 and
discount of P10,000 plus 12% vat of P16,800. The vat is computed
based on the amount after the discount.
July 16 Purchase merchandise for cash for P180,000 plus 12% vat of
P21,600. Freight cost of P5,000 was shouldered by All-in Trading.

July 16 Paid in full the account due to Christy’s Wholesale Outlet.

July 18 Received partial payment from Chase Company for P100,000.

July 22 Purchased merchandise from NAT Trading on account for P350,000

plus 12% VAT, for a total of P392,000. Freight is P25,000 which was
shouldered by All-in Trading.
July 27 Sold merchandise on account to FED Company for P672,000 which
is inclusive of 12% VAT.
July 28 Sold merchandise for cash to a customer for P892,000 inclusive of
12% vat.
July 29 Purchased merchandise for cash from NAT Trading with a total
invoice price of P134,400, inclusive of 12% VAT.
July 31 All-in Trading conducted physical inventory count of unsold
merchandises and the amount is P1,150,000.

Requirements:

a. Journalize the transactions using the special journals.

b. Posts journal entries to general ledgers and subsidiary ledgers.
c. Prepare trial balance.
d. Prepare the statement of cost of sales.

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 Answer Sheet for Test Material 12-3
General Journal

Company Name: ALL-in TRADING Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

315

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 Sales Journal
ALL-IN TRADING
Sales Journal
July 31,2016

ACCTS RECEIVALBE SALES VAT PAYABLE

DATE Paticulars Ref No. DEBIT CREDIT CREDIT

Purchase Journal
ALL-IN TRADING
Purchase Journal
July 31,2016

PURCHASES VAT INPUT ACCTS PAYABLE

DATE Paticulars Ref No. DEBIT DEBIT CREDIT

316

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 Disbursement Journal

FABM Revised.indd 317

ALL-IN TRADING
Disbursement Journal
July 31,2016

Ref CASH PURCHASES ACCTS PAYABLE VAT INPUT SUNDRY ACCOUNTS

DATE Paticulars No. CREDIT DEBIT DEBIT DEBIT ACCOUNT NAME DEBIT CREDIT

5/22/2017 10:42:57 AM
 Receipt Journal

FABM Revised.indd 318

ALL-IN TRADING
Receipts Journal
July 31,2016

Ref CASH SALES ACCTS RECEIVABLE VAT PAYABLE SUNDRY ACCOUNTS

DATE Paticulars No, DEBIT CREDIT CREDIT CREDIT ACCOUNT NAME DEBIT CREDIT

5/22/2017 10:42:57 AM
 General Journal

Company Name: ALL-in TRADING Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

General Ledger
COMPANY'S NAME: ALL-IN TRADING GENERAL LEDGER
Account Title: CASH Account No. 100-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

319

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 Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: STORE SUPPLIES Account No. 100-08

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: VAT INPUT TAX Account No. 100-13

DATE EXPLANATION PR DEBIT CREDIT BALANCE

320

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 Account Title: OFFICE EQUIPMENT Account No. 101-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: DELIVERY VEHICLE Account No. 101-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: ACCOUNTS PAYABLE Account No. 200-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

321

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 Account Title: VAT PAYABLE Account No. 200-07

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: C. MANDAP CAPITAL Account No. 300

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: SALES Account No. 400-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

322

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 Account Title: SALES RETURNS & ALLOWANCES Account No. 400-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: SALES DISCOUNT Account No. 400-03

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: PURCHASES Account No. 500-01

DATE EXPLANATION PR DEBIT CREDIT BALANCE

2016

323

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 Account Title: PURCHASE RETURNS & ALLOWANCES Account No. 500-02

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: FREIGHT IN Account No. 500-04

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Account Title: FREIGHT OUT Account No. 600-15

DATE EXPLANATION PR DEBIT CREDIT BALANCE

324

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 Subsidiary Ledger

SUBSIDIARY LEDGER
SUBISDIARY LEDGER
NAME: CHASE COMPANY Account Title: Accounts Receivable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

NAME: FED COMPANY Account Title: Accounts Receivable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

NAME: CHRISTY'S WHOLESALE Account Title: Accounts Payable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

325

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 NAME: ZIA MANUFACTURING Account Title: Accounts Payable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

NAME: NAT TRADING Account Title: Accounts Payable

DATE Particulars Ref No. DEBIT CREDIT BALANCE

NAME: Account Title:

DATE Particulars Ref No. DEBIT CREDIT BALANCE

326

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 Trial Balance

ALL-IN TRADING
Trial Balance
July 31,2016
Debit Credit

327

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 Statement of Cost of Sales

ALL-IN TRADING
Statement of Cost of Sales
For the Month Ended July 31,2016

328

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 TEST MATERIAL 12-4
NAME: DATE:
SECTION: SCORE: GRADE:

The trial balance of Smile Commercial Trading at December 31, 2016 is

presented below. The merchandising business is owned and operated by Mr. B.
Quezabar who started the business operations in April1, 2016.

The following are additional information that should be recorded at December

31, 2016:

1. The physical count of inventories showed unsold items amounting to

P1,250,000.
2. Store supplies on hand is P 20,000.
3. Office supplies on hand is P10,000.
4. The prepaid insurance was paid in April 1, 2016 for a 1- year fire insurance
premium.
5. It shows that the expired advertising amounts to P50,000.
6. Depreciation of fixed assets are as follows with no salvaged value:

Office equipment useful life 3 years

Furniture useful life 3 years
Delivery Vehicle useful life 5 years

7. Rent is equivalent to one year which was paid in April 1. This was initially
recorded as expense upon payment.
8. Allowance for uncollectible accounts should be 10% on accounts receivable.
9. Interest on notes payable has accrued at 10% per annum.

329

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 SMILE COMMERCIAL TRADING
Trial Balance
December 31,2016
Debit Credit
Cash 471,100.00
Accounts receivable 445,500.00
Allowance for uncollectible accounts 25,000.00
Merchandise inventory, Jan 1 230,000.00
Office supplies 24,300.00
Store supplies 44,100.00
Prepaid insurance 35,000.00
Prepaid advertising 125,500.00
Office equipment 115,000.00
Furniture & fixtures 55,000.00
Delivery Vehicle 670,000.00
Accounts payable 825,300.00
Notes payable 400,000.00
B. Quezabar Capital 1,000,000.00
B. Quezabar Drawings 165,000.00
Sales 4,250,000.00
Sales returns & allowances 150,000.00
Sales discounts 212,500.00
Purchases 2,540,000.00
Purchase returns & allowances 112,000.00
Purchase discounts 154,000.00
Freight in 55,200.00
Freight out 22,300.00
Salaries, wages & benefirs 445,300.00
Sales commissions 350,000.00
Rent expense 300,000.00
Communication expenses 76,500.00
Light and water 234,000.00
6,766,300.00 6,766,300.00
-

Requirements:

1. Prepare adjusting journal entries.

2. Prepare worksheet.
3. Prepare financial statements:

a. Statement of Income.
b. Statement of Financial Position.
c. Statement of Changes in Capital.
d. Statement of Cash Flow using the indirect method.

4. Prepare and journalize closing entries.

5. Prepare post-closing trial balance.

330

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 Answer Sheet for Test Material 12-4

Adjusting Journal Entries:

Company Name: Page No. 01

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

331

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 Adjusting Journal Entries:

Company Name: Page No. 02

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

332

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 Worksheet:

FABM Revised.indd 333

SMILE COMMERCIAL TRADING
Worksheet
December 31,2016
Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

5/22/2017 10:43:00 AM
 Net income for the month
TOTAL

TOTAL

TOTAL

FABM Revised.indd 334 5/22/2017 10:43:00 AM

 Statement of Income

SMILE COMMERCIAL TRADING

Statement of Income
For the Year Ended December 31, 2016

335

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 Statement of Financial Position

SMILE COMMERCIAL TRADING

Statement of Financial Position
As of December 31, 2016

336

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 Statement of Change in Capital

SMILE COMMERCIAL TRADING

Statement of Changes in Capital
For the Year Ended Dec 31, 2016

337

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 Statement of Cash Flows

SMILE COMMERCIAL TRADING

STATEMENTS OF CASH FLOWS
For the Year Ended Dec 31, 2016

338

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 Closing Entries
Company Name: Page No. 01
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

339

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 Closing Entries

Company Name: Page No. 02

GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT

340

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 Post-Closing Trial Balance

SMILE COMMERCIAL TRADING

Post-Closing Trial Balance
December 31,2016

341

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 342

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 REFERENCES

3G e-LEARNING. Accountancy and Auditing (2016). 3G ELearning FZ LLC UEA. Print.

Brigham, Eugene F., Houston, Joel F. Fundamentals of Financial Management (10th

Edition, Thomson Asian Edition). Thomson Learning Asia. Print.

Cruz, Daniel R. Accounting for Non-Accountants (2003). De La Salle University Press,

Inc. Print.

Hall, James A. Accounting Information System (7th Edition). South-Western Cengage

Learning. Pdf print, web.

Horngren, Charles T., Sundem, Gary L., Elliot, John A. Introduction to Financial
Accounting (6th Edition). Prentice- Hall International, Inc. Print.

Mejorada, Nenita D. Business Finance (8th Edition), 2003. Goodwill Trading Co., Inc.
Print.

Rante, Gloria A. Fundamentals of Accounting (2013 Edition). Millenium Books, Inc. Print.

San Gabriel, Nati C. Business Finance and Philippine Business Firms (2nd Edition). JMC
Press, Inc. Print.

https://en.wikipedia.org/wiki/History_of_accounting. Web.

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