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Gutierrez, Patricia Lorenza D. Mallari, Kimberly Rose J. Ramos, Shiela Marie I. V24
10 December 2012
INTRODUCTION
The Financial Recording Standards Council said that Accountancy is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. Providing quantitative financial information about economic entities will not be possible without accounting.
Mainly, accounting is the language of the business industry. Everything in the business world works with the aid of this body of knowledge that is surely inevitable in such field of work. It enables a company to properly record and report its operational activities to its stakeholders in compliance with the set of rules, guidelines and standards called Generally Accepted Accounting Principles or GAAP which are established by the authorities. At the end of a certain period, the company declares and informs its stakeholders investors, creditors, regulators, customers, etc. on their net income or net loss, and their current financial position, made possible by the presentation of properly-organized, reliable and accurate financial statements.
One thing that is required by GAAP is the construction of adjusting journal entries at the end of every period. Adjusting journal entries are non-standard entries that are made to correct an error in journalizing, ensuring that the book of accounts are in accordance to the GAAP. Some possible errors committed in original journal entries are mathematical inaccuracies, such as transposition and transplacement errors, and poor application of accounting principles. These are and should be corrected with the use of adjusting journal entries. Adjusting journal entries cover the following accounts: accrued expense, accrued revenue, prepaid expense, unearned revenue, depreciation and allowance for doubtful accounts. Adjusting journal entries is important to the modern-day accounting because it helps companies prepare financial
statements that are accurate, reliable and complete, that will, in turn, help them, too, in their operations.
Whitegloves Janitorial Service started two (2) years ago by Nancy Kohl. Since it performed exceptionally, Ms. Kohl decided to expand their operations on July 1, 2012. To fund the expansion, Ms. Kohl acquired a bank loan on that same day for P25 000 at 10% per annum, payable in the following terms: P10 000 on July 1, 2013, and the balance on July 1, 2014. Agreements were made between the two (2) parties. The bank, then, requires Whitegloves Janitorial Service to have P10 000 more current assets than its current liabilities at December 31, 2012. If this is not met, the interest rate will rise up to 15% instead of 10%. On December 31, 2012, Ms. Kohl presented the business Statement of Financial Position, confident that the business was able to meet the terms required. On the contrary, they were not able to meet them. Ms. Kohl presented an erroneous Statement of Financial Position which was prepared and based on a trial balance, not on an adjusted trial balance. With this they have to make adjusting journal entries to be able to present an accurate, reliable and complete Statement of Financial Position to the authorities for their bank loan.
REPORT The following are the adjusted journal entries as of December 31, 2012:
3 700 3 700
2 700 2 700
1 600 1 600
500 500
1 250 1 250
Depreciation Expense Cleaning Equipment Accumulated Depreciation Cleaning Equipment Adjusting Journal Entry Depreciation Expense Transportation Equipment
2000 2 000
5000 5000
Here are the following explanations for each adjusting entry made: 1. 2. 3. 4. 5. 6.
Below is the adjusted report-form Balance Sheet for Whitegloves Janitorial Service as of December 31, 2012:
WHITEGLOVES JANITORIAL SERVICE Statement of Financial Position 31-Dec-12 ASSETS Current Assets Cash Accounts Receivable Prepaid Expenses Total Current Assets Non-current Assets Property, Plant and Equipment TOTAL ASSETS LIABILITIES AND OWNER'S EQUITY Current Liabilities Trade and Other Payables Non-Current Liabilities Note Payable Total Liabilites Owner's Equity Nancy Kohl, Capital TOTAL LIABILITIES AND OWNER'S EQUITY P Note P 1 6 500 12 700 5 700 P 24 900
2 P
49 000 73 900
14 250
15 000 29 250
44 650 73 900
Notes to Financial Statements Note 1 - Prepaid Expenses Janitorial Supplies Prepaid Insurance Total Note 2 - Property, Plant and Equipment Cleaning Equipment Less: Accumulated Depreciation - Cleaning Equipment Transportation Equipment Less: Accumulated Depreciation - Transportation Equipment Total Note 3 - Trade and Other Payables Notes Payable Accounts Payable Interest Payable Total
P P
P P
20 000
29 000 49 000
The terms of the bank loan of Whitegloves Janitorial service was met supported by the Balance Sheet above. The current assets exceed the current liabilities by P 10,650 (P 24,900 P 14,250)