ACKNOWLEDGMENT

We would like to show our genuine and deepest sense of gratitude to the following:

To our Almighty and Omniscient God, who is the source of all wisdom, knowledge and

strength.

Fundamentals To my family, who are the source of our inspiration and aspiration in life, we thank

them for their untiring support, not just financially but also in spiritual aspect and for all

of the words of wisdom and encouragements.

ACCOUNTING EMMANUEL B. GAYOLA,CPA

(MODULE) Author

Emmanuel B. Gayola: Author i

 CHAPTER 5

Table of contents Completion of the Accounting Cycle........................ 41-50

CHAPTER 6
ACKNOWLEDGMENT........................................ i Merchandising.......................................................... 51-59

CHAPTER 7
CHAPTER 1
Special Journals and Subsidiary Ledger.................... 60-67
Accounting Overview................................................ 1-11
TERMINOLOGIES.................................................... 68-70
CHAPTER 2
Journalizing.............................................................. 12-22

CHAPTER 3
Posting...................................................................... 23-30

CHAPTER 4
Adjusting Entries...................................................... 31-40

Emmanuel B. Gayola: Author ii

 CHAPTER 1 ● Objectivity - A professional accountant should be fair and should not allow
THE ACCOUNTANCY PROFESSION AND ITS prejudice or bias, conflict of interest or influence of others to override
objectivity.
DEVELOPMENT
● Professional Competence and Due Care - A professional accountant has a
The Accountancy Profession continuing duty to maintain professional knowledge and skill at a level
required to ensure that a client receives the advantage of competent
Accountancy is not only of the modest, less expensive but also the most prestigious professional service.
profession in the land today. Accountancy is least known and unpopular because of the
nature of services it accorded to its clients which is handled with much needed ● Confidentially - A professional accountant should respect the
“confidentially”. The accountancy profession demands a quality confidentially of information acquired during the course of performing
High standards performance at all times to the public it served. professional services and should not use or disclose any such information
without proper and specific authority.
WHAT IS AN ACCOUNTANT?
● Professional Behavior - A professional accountant should act in a manner
A Certified Public Accountant or a Professional Accountant is a holder of a consistent with the good reputation of the profession and refrain from any
baccalaureate degree in Bachelor of Science in Accountancy (BSA), who has taken and conduct which might bring discredit to the profession.
passed the difficult and competitive licensure examination for Certified Public
Accountant and carries the titles as “C.P.A”, vested by the laws of the Republic to ● Technical Standards - A professional accountant should carry out
practice Public Accounting in general under the supervision of the Professional professional services in accordance with the relevant technical and
Regulation Commission. professional standards.

BASIC PROFESSIONAL VALUES AND ETHICS ACCOUNTING OVERVIEW

In general, the accountant’s should be able to recognize and understand ethical issues Importance of Records : The human brain can restore a huge amount of
in order to achieve the objectives of the accountancy profession wich as follows: information, however remembering all the day to day transactions would be
very difficult, if not impossible. By keeping records, he will have the ability to
● Integrity - A professional accountant should be straightforward and honest in assess which transactions provided him income and which transactions
performing profession services. resulted to expenses. He can also asssess if he will have the ability to pay his
debts on time.

Emmanuel B. Gayola CPA: Author 1

People in all walks of life, be it a professional or non-professional are living in an era
of accountability. We have to pay our income taxes, house rentals, tuition fees for our Accounting is the art of recording, classifying and summarizing in a significant
children, telephone and light bills, salaries for our house helpers and many others. manner and in terms of money, transactions and event which are in part at least
of a financial character and interpreting the results thereof.
Records may be done at the option of an individual person or by a compulsory
requirement of the government. A business entity may put all its plans in writing to be The American Accounting Association in its Statement of Basic Accounting Theory
used as a guide in the actual operation of the business, either for short-range or long- defines accounting as follows:
range.
Accounting is the process of identifying, measuring and communicating economic
In business arena, accounting is the language. It would not be easy to account information to permit informed judgement and decision by users of the
economic transactions without records. The records will tell the story concerning the information.
progress and position of the business.
Accounting Involved
As a whole, accounts use rules, procedures, practice and standards followed in the
preparation and presentation of financial statements known as Generally Accepted IDENTIFYING is the process of recognition and nonrecognition of business activities
Accounting Principles (GAAP). The development of GAAP is formalized through the as “accountable” events.
creation of the Accounting Standards Council, now Philippines Financial Reporting MEASURNG is the process of assigning of peso amount to the accountable
Standards Council (PFRSC), a standards-setting body with its pronouncements economic transactions and events.
contained previously in the Statement of Financial Accounting Standards (SFAS), now
Philippine Accounting Standards (PAS) used as the primary source of GAAP. COMMUNICATING is the process of preparing and distributing accounting
reports to possible users of accounting information.
Accounting Defined
Tacit in the communication process are recording, classifying and
The Accounting Standards Council provides the following definition: summarizing aspects of accounting.

Accounting is a service activity. Its function is to provide quantitative A) Recording - It is also called bookkeeping and journalizing. It refers to
information, primarily financial in nature, about economic entities, that is writing entity data such as economic transactions and events on the books of
intended to be useful in making economic decisions. the business systematically.

The Committee on Accounting Terminology of the American Institute of Certified B) Classifying - Similar items are grouped under a common characteristics :
Public Accountants defines accounting as follows: Asset, Liabilities, Capital, Revenue and Expenses.

Emmanuel B. Gayola CPA: Author 2

 PAR T N E R S
C) Summarizing - This is the preparation of financial statements which A B
include : Balance Sheet,Income Statement, Cash Flows Statement, Statement Partner’s Equity, Beg. P xx P xx
of Changes in Equity or Statement of recognized gains and losses and Notes to Add : Partner’s Share in profit xx xx
Financial Statements. Total P xx P xx
Less : Partners’, Drawing ( xx ) ( xx )
FORMS OF BUSINESS ORGANIZATION AND THEIR CAPITAL Partners’ Equity, End xx xx
STRUCTURE
Corporation
Sole Proprietorship - This is the biggest and the most complicated form of business organization. This is
- this is the simplest form of business organization where capital is owned and organized by at least five but not more than fifteen persons called “incorporators”. Its
provided by one person called “Proprietor” who may manage the business by capital is called “Share Capital” which is divided into units called “share” and each
himself or hire another person to do so. share has a designated value called “Par Value”. Owners of the shares are called
“Shareholders”.

Owner’s Equity, Beg. P xx

Add : Additional Investment P xx Contributed Capital
Profit xx xx Share Capital
Total Owner’s Equity P xx Ordinary Share xx
Less : Withdrawal ( xx ) Add : Accumulated Profit (Losses) xx
Owner’s Equity, End P xx Shareholders’ Equity,End P xx

Partnership Cooperative
- the capital of the business is owned or provided by two or more person called - It operates similar to a corporation. It has its Board of Directors who are
“Partners” who should set forth agreements among themselves which include selected from among its members. However, while number of voting shares in
among others, the investments of each partner, how profit and loss is to be divided and a corporation is based on shareholdings, in a cooperative, it is on a “one-man,
settlement to be made upon death or withdrawal of a partner as embodied in the one vote” basis.
“Articles of Co Partnership” they have executed.

Emmanuel B. Gayola CPA: Author 3

 ACCOUNTING ASSUMPTIONS
Nature of Business These are the basic notions or fundamental premises on which the accounting process
is based. The Financial Reporting Standards Council conceptual framework
A business firm may be classified in terms of what they offer, sell or produce. mentions two assumptions, namely ACCRUAL and GOING CONCERNS.
They are as follows : However, basic assumptions such as accounting entity, time period and monetary unit
are implicitly included in accounting.
Service Concern
- the business derived its income from services rendered to clients, in the case ACCRUAL
of professional services like that of Accountants, Lawyers, Doctors, Dentists, - Accrual accounting means that income is recognized when earned regardless of when
etc., or to customers, in the case of non-professional services, like that of a received and expense is recognized when incurred regardless of when paid.
Laundry Shop, Car Repair Shop, Janitorial Servicing.
GOING CONCERN or CONTINUITY
Merchandising - This assumption looks on a business that it will continue its operations for the
- the business is engaged in buying goods or commodities or any form of foreseeable future.
finished products and sells these at a profit. It might be a retail or wholesale
basis. ACCOUNTING ENTITY
- Under this assumption, the business enterprise is separate from the owners, managers
Manufacturing and employees who comprise the firm.
- the business is engaged in buying of raw materials and supplies to
processed or manufactured, converting them into finished products for a sale
at a profit, like that of a furniture shop, a manufacturer of cars, and a home appliances TIME PERIOD
and the like. - This postulate requires that a business must present its financial reports on
financial position, performance and cash flows for a “one-year period”.
Agriculture
- the business is engaged in planting of crops and sells its products either in raw or Calendar Year - is a one year period that starts from January 1
finished form at a profit. and ends up December 31.

Hybrid Companies Fiscal Year - is a one year period of any consecutive

- are those involve i more than one type of activity which are manufacturing, months. (e.g. June 30-July)
merchandise and service.
Nature Year - is one year period that ends when business

Emmanuel B. Gayola CPA: Author 4

 operations are at their lowest level of annual cycle. - All income Statements account are closed. This is why income statement accounts are
also called temporary accounts.
MONETARY
- Monetary unit imposes that financial statements must be stated in the 8) Post-Closing Trial Balance
Philippines peso, any changes in the value of peso may be ignored. - After the closing entries are posted, remaining accounts are totaled to reflect equal
debits and credits. Remaining accounts are called permanent accounts. This accounts
Accounting Process are reflected in the Balance Sheet.
- The accounting process also known as the Accounting Cycle defined above
can be expanded into the following detailed : (AJPUAFCPR) 9) Reversing Entries
- At the beginning of the next period, some adjusting entries are reversed to facilitate
1) Analyzing normal recording.
- Transactions are checked if it affects the elements of financial statements and
if it can be measured reliably. ELEMENTS OF FINANCIAL STATEMENTS

2) Journalizing The elements that are directly related to measurement of financial condition in the
- Economic transactions are recorded in Journals upon transactions. balance sheet are assets, liabilities and owner’s equity while the elements that are
directly related to measurement of performance in the income statement are income
3) Posting and expenses.
- Recorded transactions are classified and balances are computed.
A. ASSETS - ( Balance Sheet Account ) are defined as “resources controlled by the
4) Unadjusted Trial Balance enterprise as a result of past transactions and events and from which future
- All accounts balances are totaled to reflect equal debits and credits. economic benefits are expected to flow the enterprise”.

5) Adjusting Entries Asset are classified into two, namely current assets and non-current assets.
- Some account balances are updated to reflect their true balances.
Current Asset - refers to all assets that are expected to be realized, sold or
6) Financial Statement (FS) Preparation consumed within the enterprise’s normal operating cycle. To cite examples,
- To communicate to financial users, financial statements are prepared to show the cash, petty cash fund, cash equivalents, note receivable, accounts receivable,
company’s condition and performance. accrued income, advances to employees, inventories, prepaid expenses.

7) Closing Entries Non-Current Asset - all other assets not classified as current should be

Emmanuel B. Gayola CPA: Author 5

 classified as non-current assets. To cite examples, property and equipment, also the components of an Income Statements, a financial statement which directly
land, furniture and fixtures, accumulated depreciation, intangible assets. relates to the measurement of performance of an enterprise at the end of a given
period of time.
B. LIABILITIES - ( Balance Sheet Account ) are defined as “present
obligations of an enterprise arising from the past transactions or events, the D. INCOME or REVENUE - ( Income Statement Account ) is the inflow of future
settlement of which is expected to result in an outflow from the enterprise of economic benefits that increase equity, other than contributions or investments from
resources embodying economic benefits”. owners.

Liabilities are classified in two namely, current liabilities and non-current E. EXPENSES - ( Income Statement Account ) - are the “gross outflow of economic
liabilities. benefits during the period arising in the course of ordinary activities of an enterprise
when those outflow result in decrease in equity, other than those relating to
Current Liabilities - are financial obligations of the enterprise which are : distribution to owners”.
(a) expected to be settled in the normal course of the operating cycle,
(b) due to be settled within one year from the balance sheet date. Fundamentals of Bookkeeping
To cite an examples, accounts payable, notes payable (short term), accrued As defined, bookkeeping is the systematic and chronological recording of business
expenses. transaction or events. Transaction means exchange of values.Values referred to are
“value received” and “value parted with”.
Non-current Liabilities - are financial long term obligations of the enterprise
which are due and payable for more than one year. To cite an examples, notes
payable (long term), mortgage payable.
C. OWNER’S EQUITY OR CAPITAL - ( Balance Sheet Account ) is the residual Accounting Equation
interest in the assets of the enterprise after deducting all its liabilities. It is expressed
in the equation as Assets less Liabilities equals Owner’s Equity or Capital. ASSETS = LIABILITIES + PROPRIETORSHIP

Withdrawals - are withdrawals made by an owner from the enterprise. This account is Algebraically, the following formulas can be derived:
used only in Sole proprietorship and considered a contra-equity account.
LIABIITIES = ASSETS - PROPRIETORSHIP
Income and Expenses Summary - this is a temporary account created at the end of the
accounting period where Income and Expenses are temporary closed to the account. PROPRIETORSHIP = ASSETS - LIABILITIES

Revenue and Expenses - these are the temporary accounts of Owner’s Equity and are Accounting Equation Illustrated

Emmanuel B. Gayola CPA: Author 6

 1. Income Statement
Case A. Assume that Mr. Louie CPA invested P20,000 cash as initial capital 2. Balance Sheet
for a spare parts business called L.E Spare Parts. The business also took 3. Statement of changes in equity or statement of recognized gains and losses.
charge of the P5,000 payable of furniture and equipment it is using. 4. Cash Flows statement
5. Notes, comprising a summary of significant accounting policies and explanatory
Accounting equation then is : notes.
Assets = Liabilities + Proprietorship
= P5,000 + P20,000 Year end financial statements must be prepared, although interim statements or
Assets = P25,000 statements of less than one year may be prepared for internal purposes. Usual interim
statements are quarterly financial statements or for a period of three months.
Case B. Assume that Mr. Celso Senada invested assets worth of P 50,000 for
handicraft business. However, actual assets he invested is only P40,000.
Liabilities = Assets - Proprietorship USERS OF FINANCIAL STATEMENTS
= P50,000 - P40,000 Financial accounting information is used by a variety of groups and diverse purposes.
Liabilities = P10,000
Investor - They need information to help them determine whether they should buy,
Case C. Assume that Mr. Daryl Evardone gave cash and goods for a buy- hold or sell.
and-sell business amounting to P100,000. However, P25,000 notes payable by
him to PNB is assumed by the business. Employees - Employees are interested in information about the stability and
profitability of the enterprises.
Proprietorship = Assets - Liabilities Lenders - Lenders are interested in information which enables them to
= P100,000 - P25,000 determine whether their loans and interest thereon will be paid when due.
Proprietorship = P75,000
Suppliers and Other Trade Creditors - These users are interested in
Financial Statements are the means by which the information accumulated and information which enables them to determine whether amounts owing to them
processed in financial accounting is periodically communicated to users. The objective will be paid on maturity.
of general purpose financial statements is to provide information about the financial
position, financial performance and cash flows of an entity that is useful to a wide Customer - Customers have an interest in information about the continuance
range of users in making decisions. of an enterprise especially when they have a long-term involvement with or
are dependent on the enterprise.
The complete set of basic financial statements includes the following components :

Emmanuel B. Gayola CPA: Author 7

 Government and their Agency - These users require information to regulate BLESSED COMPANY
the activities of the enterprise, determine taxation policies and as a basis for Income Statement
national income and similar statistics. For the period December 31, 2015

Public - Enterprises affect members of the public in a variety of ways. Service Revenues P10,110
Financial statements may assist the public by providing information about the Less : Expenses:
trends and recent developments in the prosperity of the enterprise and the Advertising Expense P5,225
range of its activities. Rent Expenses 400
Salaries Expense 800
Other Expense 500 6,925
INCOME STATEMENT Net Income P3,185
An income statement is a formal statement showing the financial
performance of the enterprise for a given period of time. The income
statement presents income and expenses. Accounts in the income statement BALANCE SHEET
A balance sheet is a formal statement showing the financial position of the enterprise
are called nominal or temporary accounts. These accounts are all closed at the
as of a particular date. The balance sheet reflects the three elements of financial
end of the period. Thus no income statement account can be seen at the books
position, namely assets, liabilities and capital. All accounts in the balance sheet are
every start of the next period.
called real or permanent accounts. These accounts are not closed at the end of the
period.
To illustrate an income statement, consider that Mr. Rogelio Eyoy establish an
advertising business on December 1,2015. For the whole month of December,
To illustrate a balance sheet, assume that Mr. Rogelio Eyoy has the
below are the pertinent data:
following information in his journal as of December 31,2015:
1. Total service revenues for the month P10,110
1. Total Cash P5,235
2. The following are the expenses:
2. Receivable from customer 750
a. Advertising expense P5,225
3. Delivery Equipment for business 16,500
b. Rent expense 400
4. Table, chairs and other fixtures 1,950
c. Salaries expense 800
5. Payable to Cyrex Commercial 250
d. Other expenses 500
6. Initial capital of P22,000 decrease
by personal withdrawal of 1,000
7. Profit for the month 3,185

Emmanuel B. Gayola CPA: Author 8

The heading of the balance sheet is composed of the name of the owner or business 1-2 BLESSED COMPANY
owners, the name of the statement, and the date of the statement. It should be noted Balance Sheet
that a balance sheet is as of a given date. The body of a balance sheet is composed of As of December 31,2015
the assets, liabilities and proprietorship.
Assets
Cash P5,235
1 Accounts Receivable 750
QUESTIONS Delivery Equipment 16,500
Furniture & Equipment 1,950
1. What is accounting? Total Assets P24,435
Liabilities and Proprietorship
2. Differentiate debit from credit.
Liabilities
3. What are the elements of the financial statements? Accounts Payable P250
Proprietorship
4. What are financial statements?
Eyoy, Capital P22,000
5. What is a balance sheet? Less: Withdrawal 1,000
21,000
6. What are the basic accounting assumptions?
Add: Net Profit 3,185 24,185
7. Give the accounting equation in three formulas. Total Liabilities and Proprietorship P24,435
8. What is transaction?
TRUE or FALSE
9. What are Assets?
10. Why is keeping of records important in business? Instruction: Write letter “T” if the statement is correct and “F” if the
11. What are the three (3) annual accounting periods? statement is wrong.
12. What is periodicity concept in accounting?
_____ 1. When total cost and expenses will equal to total sales, the sale is at
break even.

Emmanuel B. Gayola CPA: Author 9

 _____ 2. The primary motive of a person engaged in business is profit. 2. Which of the following account titles that is differently classified from others?
_____ 3. Accounting provides management with information which are of a. Drawing Accounts c. Supplies Used
financial in character and identifies which data is relevant for decision- b. Rent Expense d. Taxes and Licenses
making.
_____ 4. In accounting, a clear distinction between business transactions and 3. Financial Statements prepared are worth comparing for with other companies of the
personal affairs of the owner should be made so that financial report will not same line of business by pointing out similarities and differences -
be distorted. a. Understandability c. Relevance
_____ 5. The excess of revenues over expenses is called operating loss. b. Consistency d. Comparability
_____ 6. The separation of the owner and his business is only an accounting
assumption which is not true in real situation. 4. Profit will result during a time period when -
_____ 7. Preparation and presentation of the financial statements of the entity a. Expenses exceed revenues c. Asset exceed Liabilities
is the primary responsibility of an accountant. b. Revenue exceed Expenses d. Asset exceed Revenue

1-3
MULTIPLE CHOICE 5. What is the basic accounting equation?
a. A = L + OE c. A = L - OE
1. The anticipated loss that the business may incur arising from an uncollected
b. L + OE = A d. OE = A - L
receivable account is termed as -
a. Allowance for Doubtful Accounts c. Uncollectible Accounts
6. The excess of revenues over costs and expenses -
b. Estimated Uncollectible Accounts d. Provision for Doubtful Accounts
a. Expenditure c. Loss
b. Break-even d. Profit

Emmanuel B. Gayola CPA: Author 10

 1. Mr. Bagyo started business by investing P7,500 cash. In addition, the business
7. This represents the claim of the creditor’s over the assets of the enterprise - assume a payable to Mr. Arancon amounting to P1,500.
a. Revenue c. Expenses
b. Owner’s Equity d. Liabilities Question : Based on the above information, formulate the accounting equation.

8. What principle in accounting that requires financial statements should be 2. Mr. Pogie invested assets worth of P20,000 for Laundry Shop Business. However,
free from any material misstatement? actual assets he invested is only P15,000. Accounting equation will be?
a. Objectivity c. Consistency
b. Neutrality d. Adequate Disclosure 3. Below are information of Andress Enterprises as of December 31,2016:
Cash P5,000
9. These are called components of an income statement - Accounts Receivable 15,000
a. Revenue and Gains c. Revenue and Losses Other Assets 5,000
b. Revenue and Expenses d. All of the above Accounts Payable 10,000
10. The new standard-setting body that replaces the Accounting Standards Council - Andress Capital ?
a. Financial accounting Standards Council 4. Prepare a simple Balance Sheet from the following data of M and M as of
b. International Accounting Standards December 31,2016:
c. Philippine Financial Standards Council
d. None of these A. Cash on Hand P2,500
B. Receivables from customers 10,500
Exercises and Problems C. Counters chairs and tables 2,000
D. Delivery Equipment 15,000

Emmanuel B. Gayola CPA: Author 11

 E. Payable to Trolls Company 8,000
F. Initial Capital of 20,000 decrease by
Personal withdrawal of 1,500
G. Profit for the month 3,500

5. Based on the following information, prepare a simple Income Statement Ms.

Mary Jane Bagay for the period December 1 to 31, 2016.
A. Total service revenue for the month P10,000
B. Supplies Expense 7,000
C. Rent Expense 500
D. Salaries and Wages 1,000
E. Other Expense 500

Emmanuel B. Gayola CPA: Author 12

 CHAPTER 2 Accounts Normal Balance
JOURNALIZING TRANSACTIONS 1. Assets ------------------------------------Debit
(1ST Step of the Accounting Process) 2. Liabilities ------------------------------- Credit
3. Proprietorship -------------------------- Credit
4. Income ---------------------------------- Credit
BOOKS OF ACCOUNTS
5. Expenses -------------------------------- Debit
The records that are used and kept by the business in storing all of the accounting data
6. Drawing --------------------------------- Debit
are called Books of Account. There are two sets of books that are used by the business
7. Accumulated Depreciation ----------- Credit
(1) book of original or JOURNAL which is of two kinds; the GENERAL JOURNAL
8. Allowance for Doubtful Accounts --- Credit
and SPECIAL JOURNAL. (2) The book of final entry is called the LEDGER which is
also of two kinds; the GENERAL LEDGER and SUBSIDIARY LEDGER.
Rules of Debit-Credit (ALPIE RULE)
Accounting Equation Particular If Debited If Credited
The basic accounting equation would be as simple as: Asset Increase Decrease
Assets = Liabilities + Proprietorship Liabilities Decrease Increase
Proprietorship Decrease Increase
However, the accounting equation may be expanded into Income Decrease Increase
Expenses Increase Decrease
Original Capital
+ Contra accounts are exception from the ALPIE rule. Contra accounts
Additional Investment are accounts deducted from another account. Contra accounts are not
Assets = Liabilities + - off-setted rather it is presented below the account it will be deducted.
Withdrawal Some of these accounts are as follows:
+
Income
-
Expenses
Normal Balance
This accounting terminology refers to the ordinary balance of different accounts.

Emmanuel B. Gayola CPA: Author 13

 CHART OF ACCOUNTS JOURNAL
When transactions are recorded in the general journal, account titles are being A general journal or simple “journal” is also called book of original entry. It is called a
used. A list of account titles are prepared beforehand to guide bookkeeper and book of original entry because it is here where transactions are initially recorded in
accountant of what specific titles are to be used in describing the exchanges of chronological order, usually by its date of occurrence.
values in a transaction. This list of account titles is called Chart of Accounts.

YHANG ONLINE A general journal has the following columns:

Chart of Accounts 1. Date - The date of the transaction is listed here.
Year 2015 2. Particular - The account debited and account credited is listed here. A
brief explanation is also necessary.
Code # Assets Accounts Code # Income Accounts 3. Folio - The post reference of the transaction.
1 Cash 70 Service Revenue 4. Debit - The peso amount debited.
2 Notes Receivable 71 Sales 5. Credit - The peso amount credited.
3 Accounts 72 Interest Income
Receivable JOURNAL ENTRIES DISCUSSED
4 Inventory 73 Rent Income
5 Equipment Expenses Accounts Transaction (1) Investment by owner.
6 Land 80 Advertising Expense Budic Solis decides to open an internet cafe. On August 2, 2015, he invest
7 Building 81 Salaries Expense P200,000 cash in the business, which he names Budic Online.
8 Supplies 82 Traveling Expenses
Liabilities 83 Taxes Transaction (2) Purchase of Equipment for cash.
Accounts On August 4,2015, Budic Online purchases computer equipment for P100,000
51 Notes Payable 84 Utilities Expense cash.
52 Accounts Payable 85 Rent Expense
Transaction (3) Purchase of Supplies on Credit
53 Accrued Salaries 86 Interest Expense
On August 5,2015 Budic Online purchases computer paper and other supplies
54 Bond Payable 87 Miscellaneous
expected to last several months from Crown Bookstore for P32,000. Crown
Expense
Bookstore agrees to allow Budic Online to pay this bill
Proprietorship 88 Insurance Expense in September, a month later.
61 Yhang, Capital 89 Supplies Expense
62 Yhang, Drawings 90 Commissions Transaction (4) Services Rendered for Cash.

Emmanuel B. Gayola CPA: Author 14

 GENERAL JOURNAL J1 Transaction (10) Withdrawal of Cash by Owner.
Date 2015 Particular F Debit Credit On August 30,2015, Budic Solis withdraws P26,000 in cash from the business for his
Aug.2 Cash 1 200,000 personal use.
Budic, Capital 61 200,000
Investment by owner. Journal Entries will be:
On August 17, 2015, Budic Online receives P24,000 cash from customers for
typing services it has provided.
Date Particulars F Debit Credit
Transaction (5) Purchase of Advertising on Credit. 2015
Budic Online receives a bill for P5,000 from Sunstar newspaper on August 28 Accounts Payable 52 5,000
19,2015 for advertising the opening of its business but postpones payment of Cash 1 5,000
the bill until a later date. Payment of Accounts Payable

Transaction (6) Services Rendered for Cash and Credit. 29 Accounts Receivable 3 12,000
Budic Online provides printing and online services of P70,000 for customers on Cash 1 12,000
August 20,2015. Cash amounting to P30,000 is received from customers, and the Receipt of cash on account.
balance of P40,000 is billed to customers on account.
30 Budic, Drawing 62 26,000
Transaction (7) Payment of Expenses.
Cash 1 26,000
Expenses paid in cash for August 28,2015 are store rent, P12,000, salaries of
Withdrawal of Cash by owner.
employees, P18,000 and utilities, P4,000.

Transaction (8) Payment of Accounts Payable. General Journal Form Observed

On August 28,2015, Budic Online pays its Sunstar newspaper advertising bill of Based on the journal entries made on the books of Mr. Budic, below are some
P5,000 in cash. observations:

Transaction (9) Receipt of Cash on Account. 1. The form is titled General Journal.
The sum of P12,000 in cash is received on August 29,2015 from customers who have 2. The year in the date column is written above the month.
previously been billed for services in Transaction (6). 3. Credited accounts are indented to the right.
4. Explanations are intended to farther right.

Emmanuel B. Gayola CPA: Author 15

 5. The folio column reflects their coded numbers. 2. A 4 Equipment 5 100,000
6. A journal page number is written on the upper right.
Cash 1 100,000
Purchase of Equipment for cash.
Importance of Journal
The forms provides many benefits to a businessman. These are as follows:
1. Transactions are recorded completely in one book. 5 Supplies 8 32,000
2. Chronological recording is facilitated. Accounts Payable 52 32,000
3. Cross-checking is made easy. Purchase of supplies on credit.
4. Errors are minimized.
17 Cash 1 24,000
2-1
Service Revenue 70 24,000
QUESTIONS Services Rendered for Cash.
1. What is a chart of account? 19 Advertising Expense 80 5,000
2. What is Journalizing? Accounts Payable 52 5,000
Purchase advertising on credit.
3. What are the two kinds of ledger?
4. Why is the significance of the folio column in a journal? 20 Cash 1 30,000
Accounts Payable 52 40,000
5. What is a double-entry system of bookkeeping?
Service Revenue 70 70,000
Services Rendered for cash and credit.

2-2
28 Rent Expense 85 12,000
MULTIPLE CHOICE Salaries Expense 81 18,000
Utilities Expense 84 4,000
1. The source document issued by the supplier acknowledging that payment has been Cash 1 34,000
received from the customer - Payment of expenses.
source document which accompanies a check when payment is made -
a. Check c. Official Receipt
a. Check Voucher c. Cash Voucher
b. Voucher d. Deposit Slip

Emmanuel B. Gayola CPA: Author 16

 b. Purchase Voucher d. All of the above b. Expense d. Owner’s Equity
8. A general journal has provided columns for -
a. Description c. Date
b. Folio d. All of these
3. The source document which shows the lists of items to be requisitioned by the 9. To guide a bookkeeper of the correct description of an account title -
purchasing department of a firm - a. Trial Balance c. Journal
a. Purchase Order c. Purchase Request b. Chart of Accounts d. Ledger
b. Customer’s Order slip d. All of the above 10. Unearned Service Income account is a/an -
4. What function do accounting journals serve in the accounting process? a. Liability c. Income
a. Classifying c. Reporting b. Owner’s Equity d. Asset
b. Recording d. Summarizing
5. Which of the following account titles that is differently classified from the others 2-3
listed? MODIFIED MATCHING TYPE
a. Suppliers Inventory c.Accounts Receivable
Instruction: From the list of possible answer, write the letter that corresponds to each
b. Cash in Bank d. Owner’s Equity
of the given statements.
6. Which of the following account titles that is differently classified from the others
List of Possible Answer
listed?
AA. Recording II. Journal Entry
a. Depreciation Expense c. Suppliers Inventory
BB. Official Receipts JJ. Accrual Basis
b. Service Revenue d. Uncollectible Account
CC. Cash Basis of Accounting KK. Double-entry System
7. A chart of accounts begins with -
DD. Journalizing LL. Journal
a. Liabilities c. Assets

Emmanuel B. Gayola CPA: Author 17

EE. T-account MM. Books of Accounts ___ 12. The act of recording transactions in the journal.
FF. Unit of Measure NN. Folio
___ 13. The value of peso remains steady regardless of inflation rates.
GG. General Ledger OO. Simple Journal Entry
___ 14. An entry made in the Journal.
HH. Opening Journal Entry PP. Chart of Accounts
Given Statements ___ 15. Recognizes the two-fold effects of a transactions.

___ 1. Describes what account title to be used. ___ 16. An entry recording the initial investment of the owner.

___ 2. The first phase of accounting. 2-4

___ 3. The skeleton form of a ledger.
TRUE or FALSE
___ 4. Storage of accounting data.
___ 1. Journalizing is the first step of the accounting process.
___ 5. Means posting reference.
___ 2. A Journal entry is said to be complete even without an “explanation”.
___ 6. An entry containing one debit and one credit item.
___ 3. The skeleton form of a general ledger is a T-account.
___ 7. The source document to acknowledge payment has been received.
___ 4. An erroneous journal entry cannot be corrected anymore.
___ 8. The book of final entry.
___ 5. Folio is the ledger shows the page number of a Journal where the entries are
___ 9. Comparison of Cash Receipts and Cash Disbursement.
taken from.
___ 10. The book of original entry.
___ 6. Entries in the journal are transferred to the ledger for the final recording.
___ 11. Income is recorded although not earned and expense recorded although not
___ 7. Folio is the term for “Posting Reference”.
paid.

Emmanuel B. Gayola CPA: Author 18

___ 8. There is no indention for the accounts debited and credited in a journal entry. 2. The __________ bookkeeping system is usually used by small business enterprises.

___ 9. Recording is the first phase of accounting. 3. __________ shows the number of an account in a ledger or page of a ledger to

which it was transferred.

___ 10. When a journal entry is erroneous, the best thing to do is to leave it because the 4. __________ shows the date when the transactions took place.

owner has no knowledge about accounting. 5. Under ___________, income is recorded only when cash is actually received.

2-5 6. __________ shows the item or the accounts debited and credited as a result of a

transaction analysis as well as a brief or concise explanation of what the transaction is

FILL IN THE BLANK
about.
Journalizing Close Account Accrual Basis Debit Column
7. A __________ is one that has one debit item with a debit amount and one credit item
Credit Column Single-Entry General Ledger Credit Balance
with a credit amount.
Recording Debit Balance Folio Books of Account
8. __________ is the 1st phase of Accounting.
T-account Date Column Chart of Accounts Cash Basis
9. __________ is the act or recording business transactions in the Journal.
Opening Entry Particulars Simple Journal Entry
10. __________ is the money column showing the peso amount of the value parted
Compound Journal Entry
with in a transaction.
1. __________ on the other hand, records income even cash is not received yet for as
11. __________ is a money column showing the peso amount of the value received in
long as it is earned.
a transaction.

Emmanuel B. Gayola CPA: Author 19

12. A __________ can that also be of a loose leaf or book bound form.

13. The records that are used and kept by the business in storing all of the accounting

data are called __________.

Exercises and Problems
14. This list of account titles is called __________.
1. Transactions for the Buniknik Company for the month of February are presented
15. The first entry made in the General Journal is called an __________.
below. Prepare necessary journal entries for each transaction.
16. A general ledger in its skeleton form is a __________.
Feb. 2 - Buniknik invests P22,500 cash in a small building business of which she
17. A __________ is one that may have one debit item and two or more credit items.
is the sole proprietor.
18. The debit side total is bigger than the credit side total, the difference in amount is
Feb. 3 - Bought equipment on account for P14,500.
called __________.
Feb. 4 - Paid P7,500 to Landlady for February rent.
19. If the credit side total is bigger than the debit side total, the difference in amount is
Feb. 16 - Billed Mr. Ian P6,500 for welding work done.
called __________.

20. If both totals of credit and debit sides are equal, the account is said to be _______.
2. The following are transaction for Mr. Duterte an architect, in his first month of

business:

Jan. 5 - Invested P80,000 cash in the business.

Jan. 7 - Purchased used car for P70,000 cash for use in the business.

Emmanuel B. Gayola CPA: Author 20

 Jan. 8 - Purchased supplies on account for P8,000. 16 - Mr. Louie the Genius withdraw P500 cash for personal use.

Jan.12 - Paid P4,000 cash for advertising start of the business. 23 - Paid News Maker amount due on June 7.

Jan. 14 - Billed customers P28,000 for services performed. 28 - Received P16,000 cash from customers.

Jan. 17 - Received P17,000 cash from customers billed on Jan. 14. Requirement : Prepare necessary journal entries for the month of June.

Jan. 18 - Paid creditor P8,000 cash.

Jan. 21 - Withdraw P10,000 cash for personal use of the owner. 4. Mr.Eyoy established EFEM Travel and Tours a business dealing with booking and

Requirement : Prepare necessary journal entries. packaging of local and international tours. At the beginning of accounting period, his

book of account have the following details and balances.

3. On June 1, Louie the Genius established his Travel Agency. The following Account Title Balances

transactions were completed during the month: Cash P40,000

June 2 - Invested P40,000 cash in Land Bank. Accounts Receivable 70,000

4 - Paid P800 cash for office rent. Notes Receivable 10,000

5 - Purchased office equipment for P5,000 cash. Office Equipment 220,000

7 - Incurred P600 of advertising costs in the News Maker. Office Machine 40,000

8 - Paid P1,200 cash for office supplies. Office Furniture 50,000

11 - Received P18,000 for service rendered and P2,000 cash from customers. Accounts Payable 80,000

Emmanuel B. Gayola CPA: Author 21

 Notes Payable 50,000 - Paid PLDT P1,800.

Melanie, Capital 300,000

In August 2015, she consummated the following business transactions: Aug. 16 - Paid SOCOTECO bill for the 620 KWH electricity consumption for the

Aug. 2 - Invested P500,000 in cash. period Aug. 1-15, 2015, P2,000.

Purchased computers, P55,000 on cash. Aug. 18 - Sent billing statement to Manila Consultant for booking services,

Purchased tables and chairs from Recto Supply Company, P50,000, P64,000.

paying P10,000 cash and the balance on credit. Aug. 20 - Received checks from Manila Consultant, P50,000 and a promissory

Aug. 4 - Paid contractor for carpentry services on office divisions, P12,000 note for the balance.

Aug. 6 - Paid PLDT for the purchase of PLDT telephone unit and installation of Aug. 25 - Received checks from Marriot International Hotel for commissions on

DSL lines, P1,200. travel services rendered P30,000.

- Paid P4,500 to Manila City government for business permits and licenses. Aug. 30 - Paid salaries to the period Aug. 16-30, 2015 for P18,000.

- Purchased supplies, P2,750. - Received P100,000 Bank Loan on June 30,2016.

Aug. 7 - Bought fax machine, P8,000. Aug. 31 - Rendered Baking services to Miss April Lyn P20,000 on credit.

Aug. 8 - Collected service fees for booking services, P4,000.

Aug. 10 - Paid liability to Recto Supply Company, P24,000.

Aug. 15 - Paid personnel salaries, P15,000.

Emmanuel B. Gayola CPA: Author 22

 the indicated journal entries for each sets of transactions:

5. Mr. Marlou Mortel established an advertising business on December 1, 2016. For the 1) On September 20X7, the company received a 48,000 payment from an

whole month of December, below are the pertinent data: advertising client for a 6-month advertising campaign. The company was to run

1. Total service revenues for the month P10,110 from November 20X7, through the end of April 20X8. Prepare the journal entry on

2. The following are the expenses: September 1, and the December 31 end of year adjusting entries.

A. Advertising Expense 5,225 2) The company began 20X7 with 360,000 in unearned revenue relating to sale of

B. Rent Expense 400 subscriptions for future issues. During 20X7, additional subscriptions were sold

C. Salaries Expense 800 for P3,060,000. Prepare a summary journal entry to reflect the sales of

D. Other Expenses 500 subscriptions and the end of year adjusting entry to reflect magazines delivered.

Requirement : Prepare an Income Statement. 3) The company received a P9,000 rental payment on December 16, 20X7, for the

period running from mid December 16 journal entry, as well as the December 31

6. Caritas Publishing, issues the weekly welder. The company primary source of end of-year-adjusting entry.

revenue is sales of subscription from customers and sales of advertising in the weekly

welder. Caritas owns its building and has the excess office space that is leases to

others. The following transactions involved the receipt of advance payment. Prepare

Emmanuel B. Gayola CPA: Author 23

 3rd step - In the “particular” column of the ledger, state briefly the nature of the of the
transaction, how cash existed in the record.

4th step - In the “folio” column of the ledger , write down the page of the
CHAPTER 3 journal where the account “Cash in Bank” entry was taken from the
POSTING TO THE LEDGER AND TRIAL BALANCE simultaneously, write down in the “folio” column of the journal the account or
page number assigned to the account “Cash in Bank”. This is called “Cross-
PREPARATION referencing” or “crossing-indexing.
(2nd and 3rd Steps of the Accounting Process)
5th step - Enter in the debit money column of the ledger “Cash in Bank” the
The process of transferring entries from the journal to the ledger is what we call amount and the same procedure is followed in posting the next account and
“posting” which is the second step of the accounting process. Posting simply means subsequent journal entries.
updating the ledger accounts due to the effects of the transactions recorded in the
journal to its kind,class or nature. This refers to “Classifying”, which is the second FOOTING THE LEDGER
phase of accounting. After posting the journal entries to the ledger, the amount of debit and credit
are being totaled and usually done at the end of each month. This is called
PROCEDURES IN POSTING JOURNAL ENTRIES TO THE LEDGER “footing”.

The account in the ledger are arranged and placed with an account or page number FOOTING is the process of adding each of the two columns of an account or
according to the sequence of the listing of account titles in the Chart of Accounts item in the general ledger and finding their balances thereof.
(Assets, Liabilities, Capital, Income and Expenses).
Shown below the General ledger of Eleven Laundry Services, in posting and
STEPS IN POSTING THE JOURNAL ENTRIES TO GENERAL LEDGER footing of each account.

1st step - As the first account in the General journal entry is “CASN IN BANK”, turn
the ledger to the page where the account “ Cash in Bank” is located.

2nd step - In the ledger of the account “Cash in Bank” enter the date column t the left
side (debit) of the said ledger the date when transaction occurred as shown in the
journal.

Emmanuel B. Gayola CPA: Author 24

 GENERAL LEDGER
CASH
SERVICE INCOME Date Particulars Ref Debit Credit Balance
Date Explanation Ref Debit Credit Balance Jan.1 Initial Investment J-1 5,000 5,000
2015 3 Monthly Rent J-1 200 4,800
Jan.8 Repair Services J-1 400 400 5 Purchase of Repair E. J-1 1,000 3,800
30 Repair Services J-1 480 880 8 Collection J-1 400 4,200
31 Repair Services J-1 250 1,130 9 Payment of Supplies J-1 350 3,850
RENT EXPENSE 15 Payment to Jasmin J-1 1,000 2,850
20 Trainee Salary J-1 100 2,750
Date Explanation Ref Debit Credit Balance
2015
Trial Balance
Jan.3 Monthly Rent J-1 200 200
- Under this form of a trial balance, listing of the debit or credit balances of
SUPPLIES EXPENSE each account in the general ledger that are remaining open after footing has
Date Explanation Ref Debit Credit Balance been done.
2015 A trial balance as the following:
Jan.9 Repair Supplies J-1 350 350 a. Name of the business or proprietor.
b. Title of the report.
SALARIES and WAGES c. Period covered by the report.
Date Explanation Ref Debit Credit Balance
2015 PROCEDURES IN PREPARING THE TRIAL BALANCE
Jan.20 Trainee J-1 100 100
1ST Step - See to it footing of each ledger account is properly done;
2nd Step - List down all accounts in the General Ledger with “Open Balances”
following the sequence of filling the accounts in the ledger and simultaneously
write down the accounts amount balance in the debit or credit column of the

Emmanuel B. Gayola CPA: Author 25

 trial balance depending on what account balance they may have. No 2015
indentions are made in listing the account titles. Jan. 5 Acquisition from Jasmin J-1 2,000
3rd Step - After listing the last account title, draw a single line across the two 15 Payment to Jasmin J-1 1,000 1,000
amount columns and foot the debit and credit money columns. The single line
drawn is called “Single Rule”. ELEVEN, DRAWING
4rt Step - as the debit and credit totals are equal, draw a double line under the totals of
both columns. The double line draw is called “Double Rule” which signifies that the Date Explanation Ref Debit Credit Balance
trial balance is already “in balance”. 2015
Jan.25 For personal use J-1 500 500 500

ELEVEN, CAPITAL
ELEVEN AUTO REPAIR SHOP Trial Balance
ELEVEN AUTO SHOP
Date Explanation Ref Debit Credit Balance
Ttrial Balance
2015
25 Drawing J-1 500 2,250
Jan.2 Initial investment J-1 5,000 5,000
30 Collection J-1 480 2,730

ACCOUNTS RECEIVABLE
Date Explanation Ref Debit Credit Balance
2015
Jan. Eshan Trading J-1 250 250
31

REPAIR EQUIPMENT
Date Explanation Ref Debit Credit Balance
2015
Jan.5 Acquisition from Jasmin J-1 3,000 3,000

ACCOUNTS PAYABLE
Date Explanation Ref Debit Credit Balance

Emmanuel B. Gayola CPA: Author 26

 Debit Credit
Cash P 2,730
Accounts Receivable 250
Repair Equipment 3,000
Accounts Payable P 1,000
3-1 Eleven, Drawing 500
Eleven, Capital 5,000
QUESTIONS Service Income 1,130
Rent Expense 200
1. What is posting? In what books of account this is being done. Supplies Expense 350
Salaries and Wages 100
2. What is trial Balance? Balance P7,130 P7,130
4. Done in the ledger, also called ‘”book of the final entry”?
3. What is footing? How it is complished in the General Ledger?
5. Done in to facilitate posting from journal to the ledger?
4. Differentiate “single ruling” from “double ruling”?
6. A list of account and their balances at a given time?
5. What is the purpose of a Trial Balance?
7. Methods of transferring information from journal to the ledger?
3-2
8. Journal page number?
IDENTIFICATIONS
9. Date of the transaction?
1. A substitute for the standard ledger? 10. The account number designated from the chart of accounts?
2. Peso amount the transaction?
3-3
3. Explanation of the transaction?
MULTIPLE CHOICE

Emmanuel B. Gayola CPA: Author 27

 1.The double line drawn after the total of a trial balance is called - 5. The purpose of posting journal entries to the ledger -

a. double entry-system c. double rule a. so that trial balance can be prepared.

b. double file d. none of the above b. to make that debit and credit are equal.

2. An error in placing the decimal point of a figure as 2.75 incorrectly c. to prove the quality of debit and credit.

written as P275. d. to obtain updated account balance.

a. transposition error c. posting error 6. Posting is the process of -

b. sliding error d. footing error a. reconciling entries from the journal to the ledger.

b. transferring entries from the journal to the ledger.

3. What functions do general ledger served in the accounting process? c. reconciling entries from the ledger to the journal.

a. Summarizing c. Journalizing d. transferring entries from the ledger to the journal.

b. Classifying d. Interpreting 7. Posting process -

4. Ledger has been defined as “group of account” because - a. normally occurs before journalizing.

a. it shows all journal entries posted to the ledger. b. transfer of journal entries to the ledger.

b. all accounts in the ledger were all footed. c. transfer of ledger transactions data to the journal.

c. it shows from assets down to expenses. d. none of these.

d. all of the above 8. The books of account that shows similar accounts that are found in the chart in

Emmanuel B. Gayola CPA: Author 28

 the chart of a business entity. c. the balance sheet accounts.

a. Trial balance c. General ledger d. the income statement accounts.

b. Chart of account d. Balance sheet 12. A trial balance will -

9. When general ledger has has several entries on the both sides, the balance of a. show financial position of an entity.

the account is places - b. show a list of account balances from general ledger.

a. on the side with larger total. c. establish the correctness of accounting records.

b. on the side with similar total. d. prove the correctness of debit and credit entries.

c. on the side with least number of items 3-4

d. on the side with greater number of items.
TRUE or FALSE

1. “T” account is the substitute for the standard ledger.

10. The double line drawn after the total of the trial balance signifies -
2. Folio is very significant in posting similar account.
a. Double entry system c. Double file
3. A trial balance uncovers errors in journalizing and posting.
b. Double rule d. None of the above
4. Purpose of folio is to assure that the account has been posted.
11. A trial balance will record -
5. Coding is done to facilitate from journal to the ledger.
a. the account balance of the general ledger.
6. Double posting of journal entries will cause the trial balance to be “out of
b. accounts with zero balance in the ledger.

Emmanuel B. Gayola CPA: Author 29

 balance”. the balances of both accounts are given below:

7. An error in the trial balance can be discovered upon audit of the accounts. a. Collection from customers’ account, P40,000.

8. The primary purpose of the trial balance is to check the arithmetic and b. Supplies bought on account from various suppliers, P35,000.

mathematical amount posted from journal entries. c. Services rendered to various customers on account, P30,000.

9. Posting are utilized in order to know the balance of the different accounts d. Payment of account to various suppliers, P65,000.

at the end of the period.

10. The arrangement of account in general ledger is patterned from the chart Questions:

of accounts. 1. What balance will the ledger of accounts receivable show on August 31, 2016?

Exercises and Problems 2. If the trial balance is prepared on August 31, 2016, what balance will the

1. On July 31, 2016, the Accounts Receivable and Accounts Payable ledgers of Xiever accounts payable show?

Machine Shop owned and Managed by Yhang Mamoo revealed the following balances. 2. Mokoii The One opens a laundry shop business in Palang-Gaa. The following were

Debit Credit the transactions for the 1st month of operation:

Accounts Receivable P75,000 July 1 - Opened an account with BDO, P300,000.

Accounts Payable P85,000 2 - Acquired Laundry Equipment costing P25,000, paying cash of P15,000

The summary of transactions that took place during the month of August 2016 that affect and issued a note for the balance.

5 - bought a 2nd hand delivery van on account, P55,000.

Emmanuel B. Gayola CPA: Author 30

 9 - bought laundry supplies for cash, P15,000.

15 - rendered laundry services to various hotels in the Gaa and received cash, 3. The Accounts Payable account of Bunin Consultancy Services showed a credit

P20,000 and on account, P10,000. balance of P35,000 as at January 31, 2016. During the quarter, additional billing for

17 - Paid light and water expense, P5,000. (Utilities Expense) supplies purchased on account was received in the amount of P10,000.

19 - Full payment of laundry equipment, P50,000. Question : If Accounts Payable at the end is P20,000, what was the amount of supplies

21 - Withdraw cash of P5,000 for her personal use. paid during the quarter?

22 - Billed a customer for services rendered, P25,000. 4. The ledger of Keane Service Center showed the following balance:

25 - Paid rental for the month, P4,000. Accounts Receivable P140,000

28 - Collected P10,000 from from customer’s account of July 15. Accounts Payable 90,000

31 - Paid salaries for the month, P8,000. Keane, Capital 130,000

- Paid telephone bills, P4,000. Keane, Drawing 10,000

- Received cash P15,000 but services has to be rendered yet. Expenses 20,000

Required: Service Revenue 150,000

1. Prepare a Journal Entries. Cash ?

2. Post the entries to the T-Account and Foot. Question: What is the Cash Balance?

3. Prepare a Trial Balance.

Emmanuel B. Gayola CPA: Author 31

5. On January 1, 2016, the Accounts Payable account of Wawie Company showed a 1. ACCRUALS
A. Accrued Income - it is an income that is already earned but not yet collected
credit balance of P180,000. The finance officer was wondering why the balance has when the accounting period ends. (Receivables)
B. Accrued Expense - it is an expense that is already incurred but not yet paid
reached to P500,000 as of March 31, 2016. It was learned that payment of account when the accounting period ends. (Payable)

purchases made during the quarter period was only P210,000. 2. DEFERRALS (Pre-collected income and prepaid expense adjustments)
PRECOLLECTIONOF INCOME
Question : What was the amount of purchases during the quarter? A. Pre-collected Income - this is an income that is already collected but not yet
earned. This is exactly the opposite of accrued income.
Income Method - an income account is credited upon collection or receipt of
CHAPTER 4 cash. This method is also called “nominal approach” because an income is
ADJUSTING ENTRIES an income Statement account and Income Statement accounts are also called
TH nominal accounts.
(4 Step of the Accounting Process)
Liability Method - a liability account is credited upon collection or receipts
ADJUSTING ENTRIES of cash. This method is also called “real approach” because a liability is a
- Adjusting entries are journal entries which are to be recorded in the General Balance Sheet account and Balance Sheet accounts are also called real
Journal and are usually prepared at the end of an accounting period of one year accounts.
following the preparation of a Trial Balance.
To illustrate:
Purpose of Adjusting Entries On October 1, 2015, GFI Realty Co. Collected P12,000 from a tenant
It is our primary objective to present a correct financial statements which are truly representing an advance collection from building rental for one year. The
“test-meters” of the financial condition of the business as of a particular date and accounting period ends on December 31, 2015.
results of operation at the end of the accounting period.
Income Method Liability Method
Generally, adjusting entries are prepared for the following reasons: Cash P12,000 Cash P12,000
a. To bring records or balances of accounts updated. Rent Income P12,000 Unearned Rent Income P12,000
b. To properly match revenues against expenses during the period. To record collection advance rental To record collection of advance
for the period from Oct. 1,2015 to Oct. 1, rental for the period from Oct. 1,2015 to
TYPES OF ADJUSTING ENTRIES 2016. Oct. 1,2016.

Emmanuel B. Gayola CPA: Author 32

 Comparative Journal Entries Asset Method - an asset account is debited upon payment of the prepaid
Income or Earned portion is computed as follows: expense. This method is also called “real approach” because an asset is a
P12,000 = P1,000 x 3months = P3,000 Balance Sheet account and Balance Sheet accounts are also called real
12mos. accounts.
(Oct. 1,2015 to Dec. 31,2015)
Liability or Unearned portion is computed as follows: On Sept. 1,2015, Marlou Commercial paid an insurance premium covering the
P12,000 = P1,000 x 9months = 9,000 period from Sept. 1,2015 to Sept. 1,2016 in the amount of 3,600. The
12mos. accounting period ends on December 31,2015.
(Jan.1, 2016 to Oct. 1,2016)
Total Pre-Collection P12,000
Comparative Journal Entries
COMPARATIVE ADJUSTING JOURNAL ENTRIES EXPENSE METHOD ASSET METHOD
Insurance Expense P3,600 Prepaid Insurance P3,600
INCOME METHOD LIABILITY METHOD Cash P3,600 Cash P3,600
Rent Income P9,000 Unearned Rent Income P3,000 To record insurance premium To record insurance paid.
Unearned Rent Income P9,000 Rent Income P3,000 paid.
To record the unearned portion To record the earned portion Upon payment on Sept. 1,2015
(liability) of rental collected in (income) of rental collected in
advance. advance. Expense or Expired portion computed as follows:
Adjusting Entry on December 31, 2015 P3,600 = P300 x 4months = P1,200
12mos.
PREPAYMENT OF EXPENSES (Sept. 1,2015 to Dec.31, 2015)
B. Prepaid Expense -this is an expense that is already paid but not incurred.
This is exactly the opposite of accrued expense. Asset or Unexpired portion computed as follows:
P3,600 = P300 x 8months = 2,400
Expense Method - under this method or approach, an expense account is 12mos.
debited upon payment of the prepaid expense. This method is also called (Jan. 1,2016 to Sept. 1,2016)
“nominal approach” because an expense is an Income Statement accounts Total Prepayment P3,600
and Income Statement accounts are called nominal accounts.
COMPARATIVE ADJUSTING JOURNAL ENTRIES

Emmanuel B. Gayola CPA: Author 33

 EXPENSE METHOD ASSET METHOD On October 1,2015, Gensan Commercial acquired air conditioning unit for office use
Prepaid Insurance P2,400 Insurance Expense P1,200 costing P80,000. Freight paid was P5,000 and cost of installation was P15,000. The
Insurance Expense P2,400 Prepaid Insurance P1,200 estimated useful life if 5 years and residual value of P10,000.
To record unexpired (asset) To record the expired
portion of insurance premium. (expense) portion of insurance By using the above formula, annual depreciation is computed as follows:
premium.
Adjusting Entry on Dec. 31,2015 Cost of the asset - Salvage Value = P100,000-P10,000
Estimated Life in years 5years
= P18,000 Annual Depreciation
3. PROVISION for DEPRECIATION of PROPERTY and EQUIPMENT or
FIXED ASSET The adjusting entry on Dec. 31,2015 will record depreciation of the air
- Asset such as Machinery, Furniture and Fixture, Equipment, Building and Vehicles conditioning unit for the three (3) months period only:
are susceptible to a decrease in value in the future. The accounting standard requires the
allocation of the cost of the asst over its estimated useful life. In computing for ADJUSTING ENTRY
depreciation, three factors are considered. 2015 Depreciation Expense P4,500
Dec. 31 Accumulated Depreciation P4,500
a. Cost of the asset which is the amount paid to buy the depreciable asset. To record depreciation expense from the period Oct. 1 to
b. Estimated Salvage Value is the amount that can be recovered when the asset is Dec. 31,2015.
fully depreciated.. Other terms for salvage value are Scrap Value and Residual *P4,500 = (18,000 x 3/12)
Value.
c. Estimated Useful life is the number of periods an entity expects the depreciation 4. PROVISION for ESTIMATED UNCOLLECTIBLE ACCOUNTS
asset to be used.. - When a company sells on credit, some customers may not pay their accounts.
Thus, the company provides estimates, usually based on experience, and give
The Straight Line Method computes depreciation using this formula: an allowance to arrive at the net realizable value of their accounts receivable.
Net Realizable Value is the face amount of accounts receivable less any
ANNUAL = Cost of the Asset - Salvage Value allowance. Double Accounts is synonymous with Bad Debts.
DEPRECIATION Estimated life of the asset in years
Case A. Chrissy, a graphic design center, has accounts receivable worth
To illustrate: P50,000. At Dec. 31, 2015, 5% of the accounts receivable are doubtful of
collection.

Emmanuel B. Gayola CPA: Author 34

 Adjusting Entry Dec. 31 : Machinery 50,000
Dec. 31 : Doubtful Accounts Expense 2,500 Office Equipment 50,000
Allowance for Doubtful Accounts 2,500
*2,500 = (50,000 x 5%) Illustrate (B) Incorrect Entry. Mrs. Winnie purchased an automobile worth P500,000
Case B. Using the same problem in Case A, assume that there is a credit account to be used as a delivery truck. At Dec. 31,2015, it was recognized that the
balance for allowance for doubtful accounts of P1,500 before adjustments. bookkeeper recorded the transaction as:
Adjusting Entry
Dec. 31 : Doubtful Accounts Expense 1,000 Transportation Expense 500,000
Allowance for Doubtful Account 1,000 Cash 500,000
*1,000 = (2,500-1,500)
The correct entry should be:
5. CORRECTION OF ERRORS
There are many ways to commit an error in recording economic transactions. When Delivery Truck 500,000
noticed, these erroneous entries must be corrected to give the financial statements Accounts Payable 500,000
reliability. Some recording errors are presented below.
To record the error made be the bookkeeper, an adjustment should be made.
Illustration (A) Wrong use of Account title. Mr. Pooh Tee bought machinery worth Assume that the books of 2015 are still open.
50,000. At Dec. 31,2015, it was recognized that the bookkeeper recorded the transaction
as: Adjusting Entry
Dec. 31 : Cash 500,000
Office Equipment 50,000 Transportation Expense 500,000
Cash 50,000
Delivery Truck 500,000
The correct entry should be: Accounts Payable 500,000
Machinery 50,000 Illustrate (C) Transposition Error. Mr. Mickey Mouse paid P345,000 to
Cash 50,000 Spongebob for its accounts payable due. At Dec. 31, 2015, it was recognized
that the bookkeeper recorded the transaction as:
The correct the error made by the bookkeeper, an adjustment should be made.
Accounts Payable 354,000
Adjusting Entry

Emmanuel B. Gayola CPA: Author 35

 Cash 354,000 2. An income that is already collected but not yet earned?

To correct the error made by the bookkeeper, an adjustment should be made. 3. An income that already earned by the enterprise but not yet collected at the

Adjusting Entry end of the period?

Dec. 31 : Cash 9,000
Accounts Payable 9,000 4. An expense that is already incurred by an entity but not yet paid at the end

Once the adjusting and correcting entries are made, the financial statements of the period.
can be prepared.
4-1
5. A number of entities prefer to record an income upon collection or receipt
QUESTIONS
of cash even though services are noy yet rendered.
1. What is an adjusting journal entry? When it is usually prepared?
4-3
2. Give some reasons why adjusting entries are prepared?

3. What are the items that require adjusting entries? TRUE or FALSE

4. Differentiate an accrued expense from a prepaid expenses? 1. Income is an income that is already collected but not yet earned.

5. Where are adjusting entries recorded? 2. The cost of depreciation asset less accumulated depreciation is called book

4-2 value.

3. Accrued expense is an expense that is already incurred by an entity but

IDENTIFICATION
already paid at the end of the period.
1. Account expense paid in advance?

Emmanuel B. Gayola CPA: Author 36

 4. Accrued income is an income already earned by the enterprise but not yet b. Expenses d. Income

collected at the end of the period.

5. Estimated useful life is the number of periods an entity expects the 3.nominal accounts are composed of -

depreciable asset to be used. a. Income accounts c. Income and expense account

b. Expense account d. All of the above

4-4
4. Income statement accounts are also called -
MULTIPLE CHOICE
a. Permanent accounts c. Real accounts
1. Accrued income is -
b. Nominal accounts d. Adjustment accounts
a. an income already earned but not yet collected.

b. an income already collected but not yet earned.

5. Accrued income has a semblance of -
c. an income matched with expenses.
a. Unearned income c. Pre-collected income
d. none of the above.
b. Accounts receivable d. Deferred income

2. Prepaid expenses are -

6. An accrued expense adjustments would require a -
a. Asset c. Liabilities
a. Debit to liability and credit to expense

Emmanuel B. Gayola CPA: Author 37

 b. Debit to expense and credit to liability Uncollectible is known as -

c. Debit to asset and credit to liability a. net book value c. net again

d. Debit to expense and credit to owner’s equity b. net realizable value d. net of allowance method

7. An accrued income adjustment would require a - 10. Which of the following is considered an expense account?

a. Debit to Liability and credit to expense a. Prepaid expense c. Unearned expense

b. Debit to assets and credit to income b. Accrued expense d. Uncollectible account

c. Debit to income and credit to liability

d. Debit to income and credit asset Exercises and Problems

1.Following are three separate transactions that pertain to prepaid items.

8. Accrued interest income account is being presented as - Evaluate each item and prepare the journal entries that would be needed for
a. an income account c. an asset account initial recording and subsequent end-of-2013 adjusting entry. Assume the
b. a liability account d. an owner’s equity account company uses the balance sheet approach, and the initial recording is to asset

account. The company has a calendar year-end and does not make any
9. The difference between Accounts Receivable and the related Estimated

Emmanuel B. Gayola CPA: Author 38

 adjusting entries prior to December 31. needed at December 31.

1) On December 1, the company borrowed 20,000,000 at an 8% per annual

1. The company purchased an 18-month insurance policy for 9000 on June 1,
interest rate. The loan, and all accrued interest, is due in three months.
2013.
2) Early in December, the company licensed their new technology to Quick
2. The company started 2013 with 10,000 in supplies (this was previously
Computer, Inc., for use in Quick existing product lines. The agreement provides
recorded, and you do not need to make an entry for the beginning balance),
for a royalty payment from Quick to Ear creations based on Quick’s sale of
purchased 15,000 in supplies during the year, and found only 6,500 in supplies
products using the licensed technology as of December 31, P90,000 is due under
on hand at the end of 2013.
the agreement for actual sale made by Quick to date.
3. The company paid 1,200 to rent a track. The rental period began on
3) Ears Creation pays many employees on an hour basis. As of December 31,
December 16, 2013, and ends on February 14,2014.
there are 10, 640 unpaid labor hours already worked, at an average hourly rate

of 34.
2. Ear Creation Technology of Manchester recently introduced a blue-tooth enabled
4) The company estimates that utilities used during December, for which bills will
hearing aid that allows hearing-disabled users to not only hear better, but also interface
be received in January, amount to P40,000.
with their cell phones and digital music player.

The company reports the following four transactions and an event related to
3. The ledger of Mr. Baloyo Rental Business on February 31 of the current year includes
December 2016, and is seeking your help to prepare the end-of-year adjusting entries
the following selected accounts before adjusting entries have been prepared.

Emmanuel B. Gayola CPA: Author 39

 Prepaid Insurance P36,000

Supplies 28,000 4. - A. Prepaid Expense (Asset Method)

Equipment 250,000 Flying Cars,a taxi business owned by Mr. Jufel Tamala, bought a 2-year insurance policy

Accumulated Dep’n - Equipment P84,000 from Philamlife dated Jan. 1,2016 amounting P40,000.

Notes Payable 200,000

Unearned Rent Revenue 93,000

Rent Revenue 600,000 Initial Entry :

Wage Expense 140,000 Jan. 1 Prepaid Insurance P40,000

Analysis of the accounts shows the following: Cash P40,000

1) The Equipment depreciates P5,000 per month. Question : What is the adjusting entry?

2) One-Third of the unearned rent was earned during the quarter. 4. - B. Prepaid Expense (Expense Method)

3) Interest of the P6,000 is accrued on the notes payable. Initial Entry :

4) Supplies on hand total P8,500. Jan. 1 Insurance Expense P40,000

5) Insurance expires at the rate of P2,000 per month. Cash P40,000

Instruction : Prepare the adjusting entries. Additional accounts are: Depreciation Question : What is the adjusting entry?

Expense, Insurance Expense, Interest Payable, Interest Expense and Supplies Expense.

Emmanuel B. Gayola CPA: Author 40

5. Supplies (Asset Method) Unearned Service Revenue P70,000

On Aug. 20,2016, Jandee Sinining firm bought supplies amounting P50,000. Case 1. Assume that on December 31,2016, P50 worth of chairs have been delivered to

Initial Entry : Mr. Noval.

Aug. 20 Supplies P50,000 Case 2. Assume that on December 31,2016, P20,000 worth of chairs is not yet finished.

Cash P50,000 Question : What are the adjusting entries?

7. Accrued Expense

Case 1. Assuming at Dec. 31,2016, Supplies on Hand amounting to P25,000 only. A. SALARIES. At December 31,2016, Resuelo Enterprise has two-day Salaries Unpaid.

Question : What is the adjusting entry? Salaries of P100,000 for a five-day work week.

B. INTEREST from NOTES PAYABLE. On September 1,2016, Mr. Sanada borrowed

Case 2. Assuming at Dec. 31,2016, Supplies Expense is P30,000. P150,000 by issuing a 1-year note with 6% annual interest to BPI.

Question : What is the adjusting entry? Question : Give the following adjusting entries?

6. Unearned Income (Liability Method)

On September 5,2016, Mr. Solis a carpenter engaged in furniture making, received

P70,000 from Mr. Noval a 500 chairs.

Initial Entry :

Sept. 5 Cash P70,000

Emmanuel B. Gayola CPA: Author 41

 Real Account - these are the Balance Sheet Accounts namely : Assets, Liabilities and
Owner’s Equity.

Nominal Account - these are the Income Statement Accounts, namely :Income and
Expenses which are the temporary accounts of an Owner’s Equity account.

FINANCIAL STATEMENTS
CHAPTER 5
The very purpose of accounting which is to “communicate” to the proprietor
COMPLETION of the ACCOUNTING CYCLE or what happened to the Capital that he put into the business through the
(5TH to 9th Steps of the Accounting Process) financial statements.

WORKSHEET As mentioned earlier, the worksheet will help facilitate the preparation of the
Income Statement and the Balance Sheet. The Income Statement section of the
Worksheet or working paper is a columnar sheet used as a tool or bridge connecting the worksheet shows all the “Nominal Accounts” while the Balance Sheet shows
Trial Balance and Financial Statements. Its purpose is to determine the performance or all the “Real Accounts”. Nominal Accounts are the Temporary Accounts of
result of the operation and financial condition of the enterprise in a fastly manner even Owner’s Equity comprising of Income and Expenses while the Real Accounts
before adjusting and closing entries can be recorded in the General Journal. are Permanent Accounts comprising of Assets, Liabilities and Owner’s
Equity.
A worksheet is a multiple-column from that may be used in the adjustment process and
in preparing financial statements. Below are the Steps in Work Sheet Preparation: Each of the statement should bear with the following heading:
a. WHO - the name of the company or proprietor’s name if there is no
a. Prepare an Unadjusted Trial Balance trade name.
b. Enter the Adjustments in the Adjustment Columns b. WHAT - the name of title of the report or statement.
c. Enter Adjusted Balance in the Adjusted Trial Balance Columns c. WHEN - the date of the report or statement.
d. Extend Adjusted Trial Balance amounts to appropriate financial
statement columns. Note that:
e. Total the Statement columns, compute the net income (or net loss) and (a) Trial Balance
complete the work sheet. The account titles and amounts in the trial balance are copied directly

Emmanuel B. Gayola CPA: Author 42

 from ledgers accounts. In our problem, the trial balance is given.

(b) Adjustments
Additional accounts are added on the account title column to
complete the adjustments made. The adjusting entries are then posted
to their appropriate columns and use letters or numbers to cross
reference the debit and credit adjustments. Total adjustments columns

and check for equality. YHANG LAUNDRY SERVICES

Income Statement
(c) Adjusted Trial Balance For the month ended March 31,2015
Combine trial balance accounts with adjustment amounts to obtain the adjusted
trial balance.
Revenue:
(d) Income Statement Laundry Income P80,000
Extend all revenue and expense account balances to the income statement
columns. Operating Expenses:
Uncollectible Accounts P350
(e) Balance Sheet Depreciation Expense 2,500
Extend all asset and liability account balances, as well as owner’s capital and Salaries Expense 10,000
drawing account balances, to the balance sheet columns. Rent Expense 5,000
Utilities Expenses 10,000
(f) Net Income/Loss Laundry Supplies Expense 20,000
The difference of the totals of the two income statement columns determine net income Taxes and Licenses 4,000
or net loss. In the Income statement column, When credit is greater than debit there is a Advertising Expense 3,000 56,850
net income. When debit is greater than credit, there is a loss. Net Income is extended to
the credit column of the Balance sheet columns. (Net loss would be extended to the Operating Income 23,150
debit column.)
Less : Fiance Expense
After completing the work sheet, formal financial statements can be prepared as Interest Expense 1,000
presented below: PROFIT P22,150

Emmanuel B. Gayola CPA: Author 43

 Total Current Liabilities P133,000

OWNER’S EQUIPMENT
Yhang, Capital 862,000
Total Liabilities and Owner’s Equity P955,000

Report Form of the Balance Sheet

YHANG LAUNDRY SERVICES YHANG LAUNDRY SERVICES

Balance Sheet Statement of Changes in Owner’s Equity
As of March 31,2015 For the month ended March 31,2015
ASSETS
Current Assets: Yhang, Capital-March 1,2015 P850,000
Cash in Bank P743,000 Add: Additional Investment P-
Accounts Receivable P35,000 Profit 22,150 22,150
Less: Allow. for Bad Debts 350 34,650 Total P872,150
Laundry Supplies 70,000 Less: Withdrawal 10,000
Total Current Assets P847,650 Yhang, Capital-March 31,2015 P862,160
Non-Current Assets:
Property and Equipment:
Laundry Equipment P150,000 Basically, the Statement of Cash Flows is similar to your Statement of
Less: Acc. Depreciation 2,500 Cash Receipts and Cash Disbursements. Receipts are “inflows” while
Total Non-Current Assets P147,000 Disbursements are “Outflows”. Only, these are classified into:
TOTAL ASSETS P995,000
Operating Activities - the inflows and outflows of cash from the
LIABILITIES AND OWNER’S EQUITY normal operating activities of the business.
LIABILITIES
Current Liabilities: Investing Activities - the inflows and outflows of the cash from the
Notes Payable P100,000 sale or purchase of assets other than inventory.
Accounts Payable 30,000
Accrued Advertising 3,000 Financing Activities - the inflows and outflows of cash from the

Emmanuel B. Gayola CPA: Author 44

 owners and creditors of the enterprise. credit owner’s drawing for the same amount.

Preparing Closing Entries Preparing a Post-Closing Trial Balance

At the end of the accounting period, the temporary account balances (accounts found A post-closing trial balance is a list for permanent accounts and their balances
in the income statement) are transferred to the owner’s equity account, owner’s capital, after closing entries have been journalized and posted. The purpose of this
through the presentation of closing entries.Closing entries formally recognize in the trial balance is to prove the equality of the permanent account balances
ledger the transfer of the net income or net loss and owner’s drawing to owner’s capital. that are carried forward in to the next accounting period. Since all
These entries also produce a zero balance in each temporary account so it can be temporary accounts have zero balances, the post-closing trial balance will
used to accumulate data in the next accounting period separate from the data of prior contain only permanent-balance sheet accounts.
periods. Balance Sheet accounts are not closed.

Closing entries are generally journalized and posted only at the end of a company’s YHANG LAUNDRY SERVICES
annual accounting period. Closing entries is a required step in accounting cycle. These Post-Closing Trial Balance
entries are journalized in the general journal. March 31,2015

To summarize these entries, four closing entries can be followed that would accomplish Account Titles F Debit Credit
the desired result more efficiently.
Cash in Bank 1 P743,000
1. Debit each revenue account for its balance and credit Income Summary for Accounts Receivable 2 35,000
total revenues. Estimated Uncollectible Accounts 3 P 350
2. Debit Income Summary for total expenses and credit each expense account Laundry Supplies 4 70,000
for its balance. Laundry Equipment 5 150,000
3. Debit Income Summary and Credit owner’s capital for the amount of Acc. Depreciation 6 2,500
net income if loss, debit owner’s capital and then credit income summary. Notes Payable 7 100,000
4. Debit owner’s capital for the balance in the owner’s drawing account and Accounts Payable 8 30,000

Emmanuel B. Gayola CPA: Author 45

 Accrued Advertising Expense 9 3,000
Yhang, Capital 10 862,150 (a) it is expected to be realized in, or is intended for sale or consumption in the
entity’s normal operating;
TOTAL P 998,000 P998,000 The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the entity’s normal
operating cycle is not clearly identifiable, its duration is assumed to be twelve months.

(b) it is held primarily for the purpose of bring traded;

PREVERSING ENTRY (c) it is expected to be realized within twelve months after the balance
Reversing Entry is a journal entry that is being recorded in the General Journal and is sheet date; or
done at the beginning of the accounting period. For a company to operate for the first (d) it is cash or a cash equivalent unless it is restricted from being
time, there will be no reversing entry at the beginning of the period. It will only take exchanged or used to settle a liability for at least twelve months after
place from the start of the start of the second year of operation but never at the beginning the balance sheet date.
of the 1st operation. The purpose of this is to facilitate the recording of subsequent
transactions. Common current assets are: Cash, Notes Receivable, Accounts Receivable,
Accrued Interest, Inventories, Supplies, Prepaid Expenses.
Reversing entries are most often used to reverse four types of adjusting entries:
(a) Accrued Revenues Non-Current Assets
(b) Accrued Expenses All other assets not classified as current should be classified as noncurrent
(c) Prepaid Expenses using Expense Method assets.
(d) Unearned Revenue using Income Method
Common noncurrent assets include the following: Land, Building, Machinery,
Classified Balance Sheet and Income Statement Equipment, Furniture and Fixtures, Patterns, Molds, Dies and Tools.
Previously, we prepare basic balance sheets without any classification. However, correct
balance sheet presentation must classify both assets and liabilities into current and Be aware that Land is not a depreciable asset but subject to impairment loss.
noncurrent except when a presentation based on liquidity provides information that is
more reliable and is more relevant. When that exception applies, all assets and liabilities Current Liabilities
shall be presented broadly in order of liquidity. A liability shall be classified as current when it satisfies any of the following
criteria:
Current Assets
An asset shall be classified as current when it satisfies any of the following criteria: (a) It is expected to be settled in the entity’s normal operating cycle;

Emmanuel B. Gayola CPA: Author 46

 (b) It is held primarily for the purpose of being traded; (a) Administrative Expenses - are expenses related on cost of managing the
(c) It is due to be settled within twelve months after balance sheet date; business. These expenses usually do not include expenses associated to
(d) The entity does not have an unconditional right to defer settlement of selling and cost of goods sold.
the liability for at least twelve months after the balance sheet date.
Common administrative expenses are: Doubtful accounts expense, Office salaries,
Common current liabilities are: notes payable-current, accounts payable, Office supplies expense, and Depreciation of office building.
accrued interest on notes payable, salaries payable, dividends payable, income
tax payable and accrued expenses. (b) Selling Expenses - are expenses directly related in the selling
Non-Current Liabilities operation of the business.
All other liabilities not classified as current should be classified as noncurrent liabilities.
Common noncurrent liabilities include the following: Bonds payable, Mortgages payable, Common selling expenses are: Delivery expense / Freight-out, Advertising
Long-term notes payable, Lease liabilities and Obligations under employee pension expense, Salesmen’s salaries, Sales commissions, Marketing expenses,
plans. Publicity expenses, and Depreciation of delivery equipment and Store
equipment.
BALANCE SHEET FORMS
Balance sheet can be presented either as: (c) Other Expenses - are non-operating expenses which rarely occur. An
example of this is the loss on sale of property plant and equipment.
(a) Report Form - the assets, liabilities and equity are presented vertically,
assets at the top portion and liabilities and the equity in the lower portion. INCOME STATEMENT STATEMENT FORMS
This is the form used in the earlier presentations. Income statement can be prepared either using functional presentation or
natural presentation.
(b) Account Form - the balance sheet is presented horizontally, the assets
are presented on the left side and liabilities and equity on the right side. (a) Functional - this presentation is also known as cost of sales method. This
form is the one illustrated in the merchandising chapter. It classifies expenses
according to their function as cost of sales, selling expenses, administrative
Operating Expenses expenses and other expenses. But still, the nature of expenses must be disclosed
Income statement’s operating expenses are presented in merchandising chapter without in the notes of financial statements. Usually, this form provides more relevant
any classification. For better understanding of the financial statement users on how information to users than natural presentation.
net income is derived, operating expenses are classified into administrative and
selling expenses. (b) Natural - this presentation is also known as nature of expense method.
Expenses are not allocated according to their functions; instead expenses are

Emmanuel B. Gayola CPA: Author 47

 combined according to their nature. For example, expenses may be aggregated 3. An entry is prepared at the end of the period?
as: Cost of purchases, Advertising expenses, Supplies expense, Doubtful
expense, Depreciation expenses, etc. 4. The two accounts that are closed to owner’s equity?

5. The nominal balance of an account is?

6. It is debited upon repayment of expenses?

5-1
7. It is credited upon receipts of pre-collection income?
QUESTIONS
8. The normal balance of expense account is?
1. What is closing entry? 9. It contains the list of balance sheet accounts with open balance?
2. What accounts are closed at the end of the accounting period? 10. It is the last step in accounting process?
3. What is the reversing entry?
5-3
4. Where the reversing entries recorded?
TRUE or FALSE
5. What is the reason why do we have to prepare reversing entries?
1. Closing entries will not bring the account balance of all balance sheet account is
5-2
zero?
IDENTIFICATION 2. All nominal accounts are closed at the end of the period?
1. The 8th step in accounting process? 3. The income and expense summary are closed to owner’s equity?
2. Accounts that are closed at the end of the accounting period? 4. The debit side balance si bigger than the credit side balance, the amount of

Emmanuel B. Gayola CPA: Author 48

difference represent as profit? a. Profit will be deducted and losses will be added.

5. The real account are closed and are held open? b. Owner’s equity will increased by adding profit.

6. Income accounts are debited upon receipt of pre-collection income? c. Owner’s equity will increased by adding profit and decreased by deducting losses.

7. Reversing entries are prepared before opening journal ledger is made? d. All of the above

8. Reversing entries is journal entry that being recorded in the general journal and is 3. All are nominal accounts expect,

done at the beginning of the accounting period? a. Expense account c. Liability account

9. All adjusting entries on accrual are should be reversed? b. Rent expenses d. Utilities expenses

10. Profit will be deducted to owner’s equity and loss will be added? 4. Closing entries will ultimately affect,

5-4 a. Total liabilities c. Total assets

b. Total owner’s equity d. All of the above

MULTIPLE CHOICES
5. The formation of a post closing trial balance is similar to,
1. Which is the following is a real account?
a. Worksheet c. Balance Sheet
a. Income account c. Expense account
b. Trial balance d.income
b. Asset account d. All of the above
6. If the credit side balance is bigger than debit side balance, the amount difference is.
2. The purpose of closing the accounts will affect the result of its operation to owner’s
a. Loss c. Profit
equity.
b. Still remain d. None of these

Emmanuel B. Gayola CPA: Author 49

7. Income and expense account are,

a. Nominal account c. Asset account

b. Real account d. Owner’s equity

8. Which of the following entry is prepared at the end of the period? Exercises and Problems
a. Closing entry c. Opening entry Three years ago, Mr. Dominador organized JPIA Realty. At July 31,2016, the end of
b. Adjusting entry d. Reversing entry the current fiscal year, the trial balance of JPIA Realty is as follows:
9. Real and Nominal account are the, J.P.I.A Realty
Trial Balance
a. Income and expense account July 31, 2016
Debit Credit
b. Only balance sheet account Cash P3,425
Accounts Receivable 7,000
c. Balance sheet account and Income statement account Supplies 1,270
Prepaid Insurance 6,200
d. Only Income statement account Office Equipment 51,650
Accumulated Depreciation P9,700
10. The preparation of post closing trial balance can also be facilitate by the, Accounts Payable 925
Unearned Fees 1,250
a. Worksheet c. Cash account
Dominador, Capital 29,000
Dominador, Drawing 5,200
b. Balance sheet d. None of these
Fees Earned 59,125
Wages Expense 16,835

Emmanuel B. Gayola CPA: Author 50

 Rent Expense 4,200
Utilities Expense 2,715
Miscellaneous Expense 1,505
P100,000 P100,000

The data needed to determine year-end adjustments are as follows:

A. Supplies on hand at July 31,2016 is P380.

B. Insurance premiums expired during the year is P315.

C. Depreciation of equipment during the year is P4,950.

D. Accrued wages but not paid at July 31,2016 is P440

E. Accrued fees earned but not recorded at July 31,2016 is P1,000.

F. Unearned fees on July 31 is P750.

Questions :

1. Enter the Trial Balance on a Ten-Column Sheet.

2. Prepare an Income Statement.

3. Prepare a Statement of Owner’s Equity ( No additional Investment during the year)

4. Prepare a Balance Sheet.

5. On the basis of the data in the work sheet, Journalize the Closing Entries.

Emmanuel B. Gayola CPA: Author 51

 Perpetual Inventory system is characterized by using the account title Merchandise
Inventory when buying goods or commodities. Merchandise Inventory is an Asset.
Under this method, there is continuous updating of the ins and outs in the stock cards
every time there are purchases and sales of goods. The quantity and amounts of the
stocks cards are being filled-up throughout the accounting period or whole year round.

The sample of filled-up stock card of only one item is presented below:
CHAPTER 6 Supplier : Magarang Cattle Ranch
Merchandising Business Description : Top round pork
Date Unit Received Issued Balance
cost Quantity Amount Quantity Amount Quantity Amount
NATURE OF MERCHANDISING BUSINESS
Merchandising business, it generates revenue from sale of goods or commodities that it Feb.2 P250 60kgs. P 15,000
buys. The business, therefore could the buyer at one hand and a seller on the other 6 250 100 25,000 140kgs. P 35,000
hand. Basically, there are two (2) major activities that are involved in a merchandising 90kgs. P22,50 50kgs. P 12,500
business: Buying and selling activities. 10 0

Therefore, Perpetual inventory system is used, there is no need to set-up

INVENTORY SYSTEMS
Periodic Inventory system is characterized by using the account title of Purchases ending inventory because the stock card reflect both cost of sale P 22,500 and
when buying goods or commodities. Purchases is a Cost by nature. The terms Purchase the inventory at the end in the amount of P 12,500.
discounts, Purchase Return & Allowances and Freight-in are also commonly used.
Since stock card are not used, it is must that at the end of period, a physical count of Discount Terms:
merchandise is conducted to set-up ending inventories. a) 2/10, N/30 – this means that if account is paid/collected within 10 days
from the date of the invoice, a 2% discount can be availed and no discount if

Emmanuel B. Gayola CPA: Author 52

 the account is paid/collected after the 10th days or from the 11th to 30th day. Example: 2% trade discount on merchandise purchased/sold amounting to P 40,000.

b) 2/10, 1/2 ,N/30 – this means that a 2% discount can be availed if the Computation
account is being paid/collected w/in 10 days from the invoice date, 1% if List Price P 40,000
paid/collected from the 11TH TO 20th days and no discount if paid/collected Less: trade discount (2% x 30,000) 800
from the 21st to the 30th day. Invoice price P 39,200

c) 2/10, EOM – this means that as 2% discount can be availed if the account is FREIGHT-IN AND FREIGHT-OUT
paid/collected 10 days after the End of the month. Freight or Transportation expense both on merchandise bought is recorded as a debit to
freight-in or transportation-in and added to Purchases while merchandise sold is
recorded as a credit to freight-out or transportation-out and added to expenses.

CASH DISCOUNTS AND TRADE DISCOUNTS

The term Cash discount has two connotations. It can be either Purchase JOURNAL ENTRY
discount from the viewpoint of buyer or sales discounts from the viewpoint of
the sellers. Both purchase discounts and sales discounts are recorded in the BUYER/ CUSTOMER’S BOOKS SELLER/SUPPLIER’S BOOKS
business books.
Freight-in Pxx Freight-out Pxx
Example: Amount of merchandise, p 40,000 and 2% cash discount is given/ availed Cash in Bank Pxx Cash in Bank Pxx
if paid/ collected within 10 days. The deadline for payment was met.

Computation
Amount of merchandise P 40,000 CREDIT MEMORANDUM AND DEBIT MEMORANDUM
Less: 2% discount (30,000 x 2%) 800 Credit Memorandum is taken from the viewpoint of the seller or supplier who is
Net amount paid collected P 39,200 the creditor. Since the merchandise sold on account was recorded by the seller as
a debit to Account Receivable in its book, the merchandise returned by the buyer
Unlike cash discount, Trade Discount are spot discount or outright discount from a will be recorded as a credit to the same account effect to reduction of receivable.
cash or account sales that a buyer or seller can avail but are not recorded in the books
of the business. Debit Memorandum is taken from the viewpoint of the buyer/customer who is
debtor. Since the merchandise bought on account was recorded by the buyer as a

Emmanuel B. Gayola CPA: Author 53

 credit to Account Payable in its book, the merchandise returned by the buyer will Less: Merchandise inventory, End. xx
be recorded as a debit to the same account to effect the reduction of payable. Cost of sales Pxx

MERCHANDISE INVENTORY AND COST OF SALES

In the merchandising business that engaged in buying and selling of goods or COMPARATIVE JOURNAL ENTRIES
commodities. In the process, not all goods that are purchased can be sold. The goods Seller or Supplier’s book Buyer or Customer’s book
that are left unsold at the end of the period are called Merchandise Inventory.
Upon sale of merchandise Upon purchase of merchandise
There are two classes of merchandise inventory, Merchandise inventory, Beg. Which Purchases Pxx
merchandise inventory at the start of the period and Merchandise inventory, End. A Accounts Receivable Pxx Account Payable Pxx
merchandise inventory that left at the end of the period. Merchandise inventory is Sales Pxx
priced at cost and not at selling price.
Upon returned of the merchandise Upon return of the merchandise
FLOW OF GOODS Sales return & allowances Pxx Accounts payable Pxx
Merchandise Inventory, Beg. Accounts Receivable Pxx Purchase return & allowances Pxx
ADD: Purchases
Available for sale
Less: Cost of sales NET SALES
Ending Merchandise inventory A net sale is the difference between the sales and sales return & allowances.
The account of Sales is sometimes termed as Gross sales so that it can be
COST OF SALES is the merchandise inventory that are sold and also called COST differentiated from net sales. If there no returns and allowances and sales
OF GOODS SOLD at the manufacturing concern. discounts the account sales is understood to mean Net sales.

FORMULA FOR SOLVING COST OF SALES Formula for solving Net sales
Beg. Merchandise Inventory Pxx Sales Pxx
Add: Purchases xx Less: sales returns & allowances xx
Freight-in xx xx Sales discounts xx
Gross purchases Pxx Net sales Pxx
Less: Purchase return & allowances xx
Purchase discount xx
Goods available for sales Pxx

Emmanuel B. Gayola CPA: Author 54

 Accounts Receivable Pxx Cash Pxx

Freight Collect – usually the seller (shipper) instructs the carrier in charge that
PROFIT OR LOSS payment of freight will be upon arrival at buyer’s place.
When total expenses are deducted from Gross Profit, the result will either be
profit or loss depending upon the following situations.
BOOK OF THE SELLER BOOK OF THE BUYER
a) If the amount of expenses incurred during the period is smaller than the Gross
Profit, the result is PROFIT. NO ENTRY Upon arrival of carrier:
b) If the amount of expenses is bigger than Gross Profit, the result is a Loss.
Freight-in Pxx
DETERMINE THE OWNERSHIP OF MERCHANDISE Cash Pxx

In determining the ownership of merchandise, there are two (2) following shipping b) F.O.B Destination – the ownership of merchandise is transferred from the
terms: seller to the buyer at the moment the merchandise is unloaded from the vessel
upon reaching the destination. F.O.B. stands for free on board.
a) F.O.B Shipping Point – the ownership of merchandise is transferred from the
seller to the buyer at the moment the goods is loaded to the vessel at the shipping
point or point of origin regardless of the invoice. Freight Prepared – the seller pays its own freight shipment.

Freight Prepared – usually the seller (shipper) pays in advance the freight in behalf of BOOK OF THE SELLER BOOK OF THE BUYER
the buyer. The respective journal entries in the book of the buyer and seller follows:
Freight-out Pxx NO ENTRY
BOOK OF THE SELLER BOOK OF THE BUYER Cash Pxx

Account receivable-buyer Pxx Freight-in Pxx Freight Collect – usually the seller (shipper) instructs the carrier in charge
Cash Pxx Accounts payable Pxx that payment of freight will be upon arrival at the buyer’s place.

Upon receipt of reimbursement by buyer Upon the reimbursement to seller BOOK OF THE SELLER BOOK OF THE BUYER
Upon shipment of goods Upon receipt of goods
Cash Pxx Accounts payable Seller Pxx

Emmanuel B. Gayola CPA: Author 55

 NO ENTRY Accounts Receivable Pxx 5. Discuss the F.O.B Destination.
Cash Pxx
6-2

TRUE or FALSE
Upon receipt of buyer’s bill Reimbursement of Seller for
freight
1. The term cash discount has two connotations. It either is a purchases discount and
Freight – out Pxx Cash Pxx
Accounts Payable Pxx Accounts Receivable Pxx sales discount.

Accounts Payable Pxx 2. Periodic inventory system is characterized by using the account title of merchandise
Cash Pxx
inventory.

3. Credit memorandum is taken from the viewpoint of the seller.

4. The goods that are left unsold at the end of the period are called merchandise
6-1
inventory.
QUESTIONS
5. If the amount of expenses incurred during the period is bigger than the gross profit,
1. What is merchandise business?
the result is profit.
2. What is the difference between the periodic and perpetual inventory
6. Merchandise inventory is price at cost and not at the selling price.
system?
7. F.O.B Shipping point, the ownership of merchandise goods is transferred to seller.
3. What is Cost of sales?
8. The cost of sales is goods that sold.
4. Discuss the F.O.B Shipping point.

Emmanuel B. Gayola CPA: Author 56

9. F.O.B Destination, the seller who shoulders the freight charge.

10. Perpetual inventory system is characterized by using the account title of 4. Sales discount and purchase discounts are both termed of?

merchandise inventory. a. Credit memorandum c.Credit term

6-3 b. Trade discounts d. Cash discounts

5. The account sales are sometimes term as?

MULTIPLE CHOICES
a. Gross sales c. Net sales
1. It generates income from buying and selling of merchandise goods?
b. Cost of sales d. Gross profit
a. Sole proprietorship c. Merchandise business
6. Upon F.O.B destination the owner of goods?
b. Corporation d. Partnership
a. Buyer c.Debtor

b. Seller d. None of these

2. Which of the following is not an expense account?
7. Freight or transportation expenses on merchandise bought is recorded as a debit to.
a. Utilities expense c. Freight in
a. Freight or transportation out c. F.O.B Destination
b. Freight out d. Rent expense
b. Freight or transportation in d. Merchandise inventory
3. A method of inventory which characterized by using account title of purchases?
8. The merchandise returned by the buyer will be recorded as a.
a. Perpetual c. Cost
a. Debit c. Credit
b. Periodic d. None of these
b. Normal balance d. None of these

Emmanuel B. Gayola CPA: Author 57

 4. The merchandise sold is called?

9. Upon F.O.B Shipping point, who shoulders the freight? 5. Account sales that a buyer or seller can avail but are not recorded in the

a. Seller c. Buyer book business?

b. Creditor d. Debtor 6. Method of keeping the inventories by characterized by using account title

merchandise inventory?

10. If the gross profit is lesser than the expenses, the result is, 7. Purchase is a ______? By nature?

a. Increase in expenses c. Decrease on sales 8. Sales less in cost of sales is called?

b. Profit d. loss 9. The normal balance of sales is?

6-4 10. The goods that return by the customer?

IDENTIFICATION

1. The term where the seller who shoulders the freight charge?
Exercises and Problems

2. A kind of business where it generates income from buying and selling of 1. Enter the following transactions in the journal and from the information obtained

goods? prepare a Trial Balance.

3. It can be either purchase discounts or sales discount depending from whose November 10: Mr. Roy started a business with 60,000.

viewpoint the term is used? 11: Bought furniture from modern furniture for 10,000.

Emmanuel B. Gayola CPA: Author 58

 12: Purchased goods for cash 15,000.

13: Purchased goods from B. Sen and Co for 30,000 2. Norjean Motor Bikes had a Sales on account o P3,900 and Cash Sales of P1,200. If

14: Opened a bank account by depositing 16,000 the Company’s Cost of the Merchandise was P1,000, what is the company’s gross profit?

16: Sold goods for cash 15,000 3. A company had a gross profit of P4,500. If the cost of the Merchandise was P2,150,

17: Purchased stationary for 1,000 from Bharat Stationary Mart what were the company’s total sales?

18: Sold goods to Zahir Khan for 10,000 4. Kenneth Corporation had a Cash Sales of P2,760 and Sales on account of P8,200. The

19: Bought machinery for 6,000 and payment made by cheque company’s gross profit at the end of the year totaled P5,590. What was the cost of the

20: Goods returned by Zahir Khan for 2,000 Merchandise for Kenneth Corporation>

21: Payment to B Sen and Co by cheque 5,000 5. If Tools and More returns P10,000 of the Merchandise purchased from Jeasyl Supply

22: Withdrew from bank for personal use 3,000 on August 5, give the Journal Entry to record the return of the Merchandise. Also,

23: Interest paid trough cheque 2,000 prepare a new Journal Entry to record the payment on August 7 after the company’s

24: Withdrew from bank for office expenses 10,000 return.

26: Cheque received from Zahir Khan 5,000 6. Elsie Company sold P17,790 of Merchandise in 2016, with the cost of the

27: Paid electricity bill for 100 merchandise totaling P2,250. Elsie Company had the following expenses: Sales Salaries

29: Cash sales for 6,000 P2,100, Office Salaries P3,000, Advertising Expense P1,200, Office Supplies P700,

30: Commission received by cheque 5,000 Office Utilities P1,400, Depreciation on Store Equipment P1,070, Depreciation of office

Emmanuel B. Gayola CPA: Author 59

equipment P1,800, Delivery Expense P950, and Insurance Expense P1,200. The 11 - Received P3,000 cost of merchandise returned from Yhang Co.

company also had interest revenue of P2,200 and investment expense of P900. Prepare 12 - Collected the account of Yhang Co. Net of Sales returns and 3% sales

the company’s Income Statement for the Fiscal Year ended March 31. discounts.

13 - Bought merchandise for cash from Ma-Hal Co. P30,000.

7. Transactions of Rons Hardware and Auto Supply for the month of July 2016 follows: 14 - Return P1,000 cost of merchandise from Ma-Hal Co. P2,000.

July 1 - Bought merchandise for cash from Ading Enterprise, P45,000.. 15 - Bought merchandise on account from Bessy Enterprise, P35,000; Term:

3 - Returned P3,000 cost of merchandise to Ading Enterprise for not 10% if paid within 5 days.

conforming with the order. 16 - Return of P2,500 cost of merchandise from Bessy Enterprise.

4 - Bought merchandise on account costing P20,000 from Bunin Corporation 17 - Paid the account with Bessy Enterprise after deducting the purchase

Term: 2/10, N/30. return and availed a 10% purchased discount.

6 - Returned P2,000 cost or merchandise to Bunin Corporation. 18 - Additional cash investment of Pawn, the owner, P300,000.

7 - Paid the account with Bunin Corporation net of purchase returns and 2% 19 - Cash withdrawal by Pawn for personal use, P50,000.

purchase discounts. 20 - Paid salaries for the month, P20,000.

8 - Sold merchandise for cash to Niknik Trading, P25,000. Required:

9 - Received P2,000 cost of merchandise returned from Niknik Trading. Journalize the above transactions.

10 - Sold merchandise on account to Yhang Co. P20,000. Term: 3/10, N/30.

Emmanuel B. Gayola CPA: Author 60

 cash, etc. The pro-forma journal entry is:
CHAPTER 7
SPECIAL JOURNALS and SUBSIDIARY LEDGERS Cash P xx
Various credits (as mentioned) P xx
There are two kinds of journal. These are General Journal and Special Journals
which are called books of original entry.
Cash Received from sale of Merchandise:
The SPECIAL JOURNAL is sub-divided into specialized books of original entries.
They are as follows: Cash P xx
Sales P xx
1. Sales Journal or Sales Book - only transactions involving sale of merchandise Output Tax P xx
on account or on credit terms are recorded in this book. The pro-forma journal
entry is: Cash Received from refund for merchandise return to supplier:

Accounts Receivable P xx Cash P xx

Sales P xx Purchase Returns and Allow. P xx
Output Tax P xx Input Tax P xx

2. Purchase Journal - only transactions involving purchase of merchandise on Cash Received as collections with a discount:
account or on credit terms are recorded in this book. The pro-forma journal entry
is: Cash xx
Sales Discount xx
Purchases P xx Output Tax xx
Input Tax P xx Accounts Receivable xx
Accounts Payable P xx
4. Cash Disbursements Journal - only transactions involving cash payment are
3. Cash Receipts Journal - only transactions involving receipts of cash are recorded in this book such as, purchase of merchandise in cash, payment of
recorded in this book such as, sale of merchandise in cash, collection from suppliers’ account, owner’s withdrawal in cash, cash refund to customers whose
customer’s account, investment of the owner in terms of cash, cash received merchandise purchased in cash was returned, cash payment of fixed assets,
from a bank loan, refund from supplier for return of merchandise purchased in payment of expenses, etc. The pro-forma journal entry is:

Emmanuel B. Gayola CPA: Author 61

Various debits (as mentioned above) P xx Accounting practitioners use the following interchangeably:
Cash P xx
1. Sales Journal or Sales Book
Purchase of merchandise in cash: 2. Purchases Journal or Purchases Book
3. Cash Receipts Journal or Cash Receipts Book
Purchases P xx 4. Cash Payments Journal or Cash Payments Book or Cash Disbursement
Input Tax P xx Book.
Cash P xx

Payment of merchandise on account with a discount: SUBSIDIARY LEDGERS

To keep track of the customers and suppliers, all transactions related to their
Accounts Payable P xx account are posted to the subsidiary ledgers. These ledgers are customers’ or
Purchase Discount P xx suppliers’ balances that are arranged in alphabetical order, if convenient. The
Input Tax P xx subsidiary ledger frees the general ledger from the details of a individual
Cash P xx balances.

Refund to a customer for merchandise returned: At the end of the month, the total individual customer/supplier account must
equal to the controlling account of Accounts Receivable or Accounts Payable
Sales Returns and Allow. P xx posted to the General Ledger.
Output Tax P xx
Cash P xx Controlling account is the account presented in the Financial Statements.. For
example, Accounts Receivable is a collectible from customers. Thus, Accounts
The GENERAL JOURNAL is used to record transactions not mentioned in the Receivable could be debited many times with specific customer name like
special journals. General Journal may be used to record transactions such as: Accounts Receivable- Juan, then Accounts Receivable- Maria and the list goes
on. But upon presentation in the Balance Sheet, only one account receivables
a. When a credit is granted to a customer for a sales return or allowance. will appear.
b. Receipt of credit from supplier for purchases returned.
c. Acceptance of a Note Receivable from customer.
d. Purchase of assets by issuing a Note Payable.
e. Correcting, adjusting and closing entries.

Emmanuel B. Gayola CPA: Author 62

Recording Process with Special Journals and Subsidiary Ledger To illustrate accounting process with special journals and subsidiary ledgers, a
problem presented.
Transactions in Journals are recorded daily.
This chart of accounts will be used in this problem:
Sales Cash Receipts Purchases Cash Payments General DOM COMMERCIAL
(Chart of Accounts)
Accounts Payable Subsidiary General Ledger General Ledgers
Ledger 1. All General Journal
Supplier A transactions are posted Assets (1-20) Income (41-50)
Supplier B daily/upon transaction. Cash....................................01 Sales.......................................41
2. Other accounts are posted Accounts Receivable..........02 Sales Return and Allow..........42
Accounts Receivable Subsidiary daily/upon transaction. Prepaid Rent.......................03 Sales Discount........................43
Ledger 3. All accounts in the special Merchandise Inventory.......04
Customer Y journals with specific headings Expenses (51-up)
Customer Z are posted every end of the Liabilities (21-30) Purchases...............................51
month. Notes Payable.....................21 Purchase Returns and Allow..52
Accounts Payable...............22 Purchase Discount.................53
Freight-In...............................54
Proprietorship (31-40) Utilities Expenses..................55
Dom, Drawing...................31
Dom, Capital.....................32

Subsidiary Ledgers
02 Accounts Receivable 22 Accounts Payable
(Customers) (Suppliers)

Pop Girls .......................... 2-1 Jane Asiman ......................... 22-1

Ading Company ............... 2-2 Baloya Co. ........................... 22-2

Emmanuel B. Gayola CPA: Author 63

EFFECTS ON GENERAL JOURNAL
If a transaction does not fit to any of the special journals, it is recorded to the General General Journal
Journal. Date Account Title and Explanation Ref. Debit Credit
2015
When a transaction does not affect Accounts Receivables or Accounts Payable, the Jan.31 Sales Returns and Allowances 42 2,000
process would be simple. Enter the transaction to the General Journal and post the Accounts Payable-Ading Co. 2/2-2 2,000
accounts to the General Journal after words. Note that transactions in the General Journal
are posted daily to the General Journal. 31 Accounts Payable-Asiman 22/22-1 3,000 3,000
Purchase Returns and Allow. 52
However, when Accounts Receivable or Accounts Payable are involved.
Accounts Receivable Subsidiary Ledger
a. The control and subsidiary accounts must be identified upon journalizing.
b. There must be dual posting: once to the subsidiary account and once to the control Ading Corporation
account. Date Ref Debit Credit Balance
2015
To illustrate, assume that on January 31, Dom Commercial had the following Jan. 15 S1 20,000 20,000
transactions: 27 CR1 20,000 -
28 S1 10,000 10,00
1. Ading Company (Customer) requested to debit their account by returning goods that 31 G1 2,000 8,000
are of low quality, P 2,000.
Accounts Payable Subsidiary Ledger
2. Items received from Jane Asiman (Supplier) are defective. Asiman upon notice Jane Asiman
granted credit for returned goods amounting to P 3,000. Date Ref Debit Credit Balance
2015
Jan. 14 P1 40,000 40,000
25 CP1 40,000 -
26 P1 20,000 20,000
31 G1 3,000 17,000

Emmanuel B. Gayola CPA: Author 64

 7-1 _____4. In the part of the buyer sales invoice is used as a supporting

document to record sales.

QUESTIONS
_____5. Schedule of Accounts Receivable and Accounts Payable are taken
1. What is Special Journal?
from their respective subsidiary ledger.
2. What is General Journal?
_____6. Purchase of merchandise in cash is recorded in the Sales journal.
3. What are the advantages of using Special Journals than having a General Journal
_____7. At the end of each month, entries in the Special Journal are totalled
Only?
and also the entries in General Journal.
4. Differentiate Cash Receipts Journal and Cash Payment Journal.
_____8. The subsidiary journal will show the details of the controlling
5. Discuss The posting Process in each Special Journal.
accounts.
7-2
_____9. Payment of supplier’s account is recorded in the cash disbursement
TRUE or FALSE
journal.

Instruction: Write “True” if the statement is correct and “False” if incorrect. _____10. There is no division of labor when special journal is used.

_____1. Purchase of equipment on account is recorded in the purchase journal.

_____2. Sale of merchandise for cash is recorded in cash receipts journal.

_____3. For cash transaction recorded in the purchase journal the credit is entered in

the Account Payable column.

Emmanuel B. Gayola CPA: Author 65

 7-3 4. The document that usually accompanies with a sales invoice as a proof that the

goods have been deliver and acknowledge by the customer:

MULTIPLE CHOICES
a. Delivery Receipt c. Official Receipt
Instruction: Encircle the letter of your best answer
b. Cash Voucher d. Purchase Order
1. In the sale of merchandise on account transaction the entry in sales journal
5. When special journal is used, trade discounts when availed is recorded in
will require a credit to:
the:
a. Accounts Receivable c. Accounts Payable
a. General Journal c. Cash Receipts journal
b. Sales d. Purchases
b. Sales Journal d. None of the above
2. The following is recorded in the cash disbursement journal except:
6. Purchase of store supplies in cash, the entry in Cash receipts journal will
a. Sale of merchandise on account c. Cash receive from bank loan
require to debit:
b. Sale of merchandise in cash d. Collections from customer
a. Cash c. Purchases
3. The document issued by the supplier to the buyer when the latter pays his
b. Accounts Receivable d. Accounts Payable
account:
7. The following are the components of special journal except:
a. Delivery Receipt c. Official Receipt
a. Cash Payment Journal c. General Journals
b. Cash Voucher d. Purchase Order
b. Purchase Journal d. Sales Journal

Emmanuel B. Gayola CPA: Author 66

 8. This is used to record transactions not mentioned in the Special Journal: Exercises and Problems
c. Cash Payment Journal c. General Journals Problem 1. On 31 of May 2016, the following information appeared in the books Nessel
d. Purchase Journal d. Sales Journal and Rode:
9. The input tax is presented in the Balance Sheet under: Balance of Accounts Receivable control account P5,478
a. As disclosure c. Current Asset Total of schedule of debtors 2,896
b. Other Assets d. Non Current Liability Balance of Accounts Payable control account 7,368
10. The document can be used in lieu of a purchase Invoice: Total of schedule of creditors 4,034
a. Receiving Report c. Purchase Order Because the schedules and control account balances do not agree, an investigation was
b. Official Receipts d. Delivery Receipts carried out. The following errors and omissions were discovered.

1. The schedule of creditors was understand by P800 due to error in addition.

2. The balance of a debtor was left out of the schedule of debtors in error, P36.

3. The total of the accounts payable column in the cash payments journal is

overstated by P300 because of an addition error.

Emmanuel B. Gayola CPA: Author 67

 4. P160 owed by a debtor was written off as uncollectible. The write-off was Required:

recorded in the general journal, but the entry was never posted. (1). Rule columns as shown below. Indicate how the errors and omissions should be

5. The total payment ofP2,875 made to creditors was debited to the Accounts corrected by inserting the amounts in the correct columns. Obtain totals for the columns

Receivable Control account in error. and reconcile the control totals with the respective schedule totals.

6. The sales journal was incorrectly added and posted as P3,146. The total should

have been P3,416. Year 2016

7. A credit note given for P40 was recorded as P60 in the general journal and May 1 - Sold merchandise on account to Mary Jane Company, invoice no.1

posted as such. P1,600.

8. An invoice for P175 was recorded correctly in the purchases journal but posted 4 - Sold merchandise on account to Daryl Company, invoice no.2 P2,500.

to the creditor’s account as P157. 18 - Issued credit memo no.1 to Mary Jane Company for P20 for defective

9. A check received from a debtor for P59 was dishonored. To record the merchandise returned.

dishonored check, an entry was made in the cash payments journal but analyzed in
(2). Journalize the following transactions in the Sales Journal.
the accounts payable column in error. The posting to the debtor’s account in the
(3). Journalize in the General Journal for Celso Company.
subsidiary ledger was done correctly.
(4). Record in the accounts receivable subsidiary ledger and

(5). Post to General Ledger accounts as appropriate. (All sales carry credit terms of
2/10, N/30)

Emmanuel B. Gayola CPA: Author 68

 BALANCE SHEET - a formal statement showing the financial status of the business at
Accounting Terminologies
a specific date.
ACCOUNT - form maintained for each item of asset, liability or proprietorship.
BONDS PAYABLE - long-term promissory notes by the business.
ACCOUNTS PAYABLE - amount due to seller as a result of purchase on account of
BUILDING - building owned by the owner or business.
goods or service.
CASH - coins and currency owned and used by the business.
ACCOUNTS RECEIVABLE - amount due from customers of the business for
CASH PAYABLE JOURNAL - book of original entry where all cash disbursements are
merchandise sold or for services rendered on account.
recorded.
ACCOUNTING - art of recording, classifying, summarizing in a significant manner
CASH RECEIPTS JOURNAL - book of original entry where all cash receipts are
and in terms of money, transactions and events, which are in part, at least, of a
recorded.
financial character and interpreting the result thereof.
CHECKING ACCOUNT - the paying of accountabilities by the use of checks.
ACCOUNTING CYCLE - a consecutive bookkeeping steps from journalizations of
CLOSING ENTRY - entry that closes nominal accounts.
transactions up to journalizations and posting of reversing entries.
COST OF SALES - the acquisition cost of goods of manufacturing cost of good sold.
ACCRUED EXPENSES - expenses incurred but not yet paid.
DELIVERY EQUIPMENT - vehicles used for transporting goods.
ACCRUED INCOME - income earned but not yet collected.
DELIVERY EXPENSE - transportation expense incurred in forwarding goods or
ADVERTISING EXPENSE - expenses incurred but not yet collected. Expenses for
services to customers.
exposing to the public the product or business itself.
DEPRECIATION - the periodic decrease in value of fixed assets.
ADJUSTING ENTRIES - journal entries necessary to present fairy the financial
EQUITY - used interchangeably with capital or proprietorship.
condition of the business and the results of operations at the end of accounting
FOLIO - post reference.
period.
FREIGHT IN - expenses incurred on freight and handling of purchases.
ASSET - right and property owned by the business.
FREIGHT OUT - expenses incurred in the delivery of goods sold.
BAD DEBTS - estimated uncollectible accounts.
FURNITURES and FIXTURES - tables, chairs, cabinets, shelves, counters.

Emmanuel B. Gayola CPA: Author 69

GENERAL JOURNAL - the journal used if cannot be recorded to sales journal, parties other that the owner or owners.
purchase journal, cash receipts journal and cash payments journal. MACHINERY and EQUIPMENT - machines, tools, motors and the like.
GOODS - products normally for resale by business. MARKETABLE SECURITIES - bonds or stocks acquired by business for temporary
GROSS PROFIT - excess of net sales over cost of sales. investments.
IMPREST CASH SYSTEM - a system of handling cash wherein collection today are MERCHANDISE INVENTORY - finished goods owned for resale by the business.
deposited intact the following day and payments are made through checks NOTES PAYABLE - claim due to other parties where said claim is supported by
except petty expenses. written promise made by business.
INCOME FROM FEES - substitute for sale when services rendered by professionals is NOTES RECEIVABLE - synonymous to accounts receivable except that amounts due
the primary source of income. are evidenced by promissory notes.
INCOME STATEMENT - a formal statement summarizing the changes in OFFICE EQUIPMENT - typewriters, calculators, adding machines, mimeographing
proprietorship between two dates as a result of business operation/ machine, and the like.
INSURANCE EXPENSE - money paid or expenses incurred on insurance policies. OWNER’S DRAWING - personal withdrawal from the business by the owners.
INTEREST EXPENSE - money added to the principal of the principal of financial OWNER’S CAPITAL - capital invested by the owner at the beginning of the business.
obligation. Additional investment is also added to this account.
INTEREST INCOME - profit from lending of money. POST REFERENCE - used interchangeably with folio.
JOURNAL - the book where transactions are initially recorded. POSTING - the method of transferring information from the journals to the ledgers.
JOURNALIZING - the method of recording a transactions and events. PRE-COLLECTED INCOME - income collected in advance.
LAND - land used for business undertakings. PREPAID EXPENSES - expenses paid but applicable to the next accounting period.
LEDGER - where transactions and events are finally recorded; a group of accounts. PROPRIETORSHIP - interest of the owner to the business.

LIABILITIES - financial obligation or debts of the business in favor of persons or PURCHASE DISCOUNT - deduction from purchase price due to volume or cash

Emmanuel B. Gayola CPA: Author 70

 payment. SALES RETURNS and ALLOWANCES - defective or obsolete goods returned by
PURCHASE JOURNAL - book of original entry where purchase on account are customers.
recorded. SERVICE INCOME - substitute for sales when service is sold rather than goods.
PURCHASE RETURN & ALLOWANCES - return of defective or obsolete goods SUPPLIES EXPENSE - supplies utilized or consumed for the period.
purchase. TAXES - expense utilized or consumed for the period.
RENT EXPENSE - money paid or amount incurred for the use of properties. TAXES PAYABLE - government charges on property on income payable at a certain
RENT INCOME - amount of rental earned on building occupancy or properties. date.
REPAIR and MAINTENANCE - repairs and services expenses of fixed assets of the UNEXPIRED INSURANCE - insurance expense paid pertaining to the succeeding
business. accounting period.
REVENUE and EXPENSE SUMMARY - a temporary account where nominal UNUSED SUPPLIES - pensils, pens, inks, stationeries and other supplies unconsumed
accounts closed. at the end of period.
REVERSING ENTRY - a journal entry made at the start of next fiscal period to invert UTILITIES EXPENSE - expenses for heat, light and water.
an adjusting entry of a previous fiscal period. VALUE - anything susceptible of monetary value.
RULLLING OF ACCOUNT - the systematic putting of horizontal lines on the account WAGES - expenses incurred by rendition of services of an employee.
at the end of a period. WORKSHEET - an accounting paper where the trial balance is placed and analyzed in
SALES - total sales price of goods sold. order to prepare the income statement and balance sheet in an easy manner.
SALVAGE VALUE - amount recoverable from a fully deprecated asset. WRITE-OFF - refers to reducing the receivables for account finally determined to be
SALESMEN’S TRAVELLING EXPENSES - per diem of sales men. uncollectible.
SALESMEN’S SALARIES - wages of the marketing personnel.
SALES DISCOUNT - deduction from the selling price to volume or due to cash sale.
SALES JOURNAL - book of original entry where sales on account are recorded.

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