ACCOUNTING

definitions of accounting
accounting
 Is a service activity. Its function is to provide quantitative information primarily financial in nature, about
economic entities that is to be useful in making economic decision.
 Is the art of recording, classifying, summarizing in a significant manner and in terms of money,
transactions and events which are in part at least of a financial character and interpreting the results
thereof.
 Is the process of identifying, measuring and communicating economic information to permit informed
judgment and decisions by the users of the information.

components of accounting the communication process of

1. Identifying – analytical component; the first step accounting
in the accounting process. The second step in the accounting process
 Recognition or non-recognition of A. Recording or journalizing – systematic maintenance of
accountable events record through the use of journals or journal entries.
 Has an effect on assets, liabilities and  Single entry
equity  Double entry
 Economic activities (external and B. Classifying – grouping or sorting through the use of
internal transactions) general ledger in their respective accounts.
2. Measuring – technical component C. Summarizing – through financial statements
 Assigning peso amounts  Statement of financial position (balance sheet)
I. Historical cost  Statement of comprehensive income and other
II. Current cost comprehensive income (includes income statement
III. Realizable value ; profit or loss)
IV. Present value  Statement of cash flows
3. Communicating – formal component  Statement of changes in owner’s equity
 Preparing and distributing accounting  Notes to financial statements
reports to potential users.
 “language of business”
the accountancy profession
RA 9298
> The Philippine Accountancy act of 2004
Board of Accountancy (BOA)
> Body authorized by law to promulgate rules and regulations affecting the practice of accountancy profession in the
Philippines.
Public Accountancy
> Minimum of 3 years of meaningful experience in any areas of public practice including taxation; partnership or sole
practitioner, but not corporation.

areas of accounting
1. Public accounting – auditing, taxation, and management advisory service.
2. Private accounting – accounting staff, chief accountant, internal auditor and controller.
3. Government Accounting – BIR, COA, DBM, SEC, BSP, etc.
4. Academe – Professor, lecturers and the like.
accounting vs auditing accounting vs bookkeeping
Accounting is constructive in nature while the Accounting encompasses Bookkeeping.
Auditing is analytical in nature; the function of the auditor Bookkeeping is procedural; focuses on development and
starts when the function of the accountants’ end. maintenance of accounting records; this is the “how” of the
accounting. Accounting is conceptual; it answers the “why”
of an action
 financial accounting vs managerial
accounting
Financial accounting focuses on general purpose
reports intended for internal and external users; compliance
of GAAP. Manegerial Accounting focuses on special purpose
reports intended for internal users only; no need to comply
with GAAP.
ifrsc – international financial
reporting standards council
Counterpart in the Philippines is FRSC. Its main
function is to establish and improve accounting standards
that will be generally accepted in the Philippines.

gaap – generally accepted accounting principles

 Presently known as International Accounting Standards (IAS)
 These are rules, procedures and practices, standards followed in the preparation of financial statements.
 Comprise of PAS, PFRS, PI
 A social process which incorporates political action of various interested user groups as well as professional judgement,
logic and research.
users of financial information
1. Primary Users 2. Other Users
 Stockholders  Employees
 Owners  Customers
 Creditors  Government
 Potential Investors  Public

types of business according to types of business according to

ownership operations
a. Sole proprietorship a. Service business
b. Partnership b. Merchandising business
c. Corporations c. Manufacturing business
d. Cooperative d. Not for profit business

the management process

Planning >> Organizing >> Directing >> Controlling
Accounting is usually vital in the planning and controlling stage of management.

code of personal ethics

 Integrity – honest, sincere, trustworthy.
 Objectivity – not bias, not prejudicial, impartial attitude.
 Competence – adequate knowledge, skills, experience
 Independence – free from personal interest, avoid compromising relationships
 Confidentiality – no disclosure of information

financial accounting vs financial reporting

Financial reporting encompasses financial accounting. The financial accounting focuses on financial reports including
financial statements while financial reporting also covers non-financial reports related to the business.
 ACCOUNTING
conceptual framework of financial reporting
definition of conceptual framework scope of conceptual framework
 Theoretical foundation in the preparation and 1. Objective of financial reporting
presentation of financial statements. 2. Qualitative characteristics
 Useful for standard setters, preparers, users, 3. Elements of financial statements, its
auditors and other parties interested in the recognition, measurement and presentation.
subject matter. 4. Capital and capital maintenance
 Not a standard, thus standards prevails over the
framework in case of conflict. In the absence of
standards, the conceptual may be applied.
assumptions under conceptual framework
 Going concern
o Cost principle
 Accounting entity
o Parent-subsidiary relationship
 Time period
o Calendar year
o Natural business year
 Monetary Unit
o Quantifiability aspect
o Stability postulates
o Revaluation
the elements of accounting pertains to the accounting equation
Assets = Liabilities + Owner’s Equity
 Account – is the accounting device used in summarizing the effects of transactions on each asset, liability, equity,
income and expense.
 Recognition – the process of reporting of an account on the face of the financial statement.
 Assets, liabilities, and equities are component of balance sheet while income and expenses are components of income
statements.
 Balance sheet shows liquidity, solvency, and flexibility while the income statement shows the effectiveness and
efficiency of managing its resources. Also, the latter is useful in predicting future performance and the ability to
generate future cash flows.
assets
Economic resources controlled by the entity as a result of past events and from which future economic benefits are
expected to flow the entity. Asset is recognized when it is probable that future economic benefits will flow to the entity and the
asset has a cost or value that can be measured reliably. Inherent in the asset recognition is the cost principle. Assets are classified
into two: Current and Non- Current Assets.
current assets
 Cash and cash equivalents unless restricted to settle a liability for more than 12 months after the reporting period.
 Primarily for the purpose of trading
 Expects to realize the asset within 12 months after the reporting period
 Expect to realize the asset or intends to sell or consume it within the entity’s normal operating cycle
current assets are usually presented in the order of liquidity.
 Cash and cash equivalents (Cash on hand,  Inventory – held for sale
Cash in bank, Petty Cash Fund, etc.)  Prepaid expenses – expenses paid in
 Cash equivalents (3-month time deposit) advance but not yet incurred
 Receivables (Accounts receivable, Claim  Other current assets
Receivable, Receivable from Suppliers, etc.)
 Investments – held by an entity
 non- current assets are residual definition.
 Property plant and equipment
 Long-term investment
 Intangible assets
 Other non- current assets
liabilities
Present obligations, which may be legal or constructive arising from past events the settlement of which is expected to
result in an outflow from the entity’s economic resources embodying economic benefits. Liability is recognized when it is probable
that an outflow of resources of embodying economic benefits will be required for the settlement of a present obligation and the
amount of obligation can be measured reliably. Liabilities are classified into two: Current and Non-current Liabilities.
current liabilities
1. Expects to settle the liability within the entity’s normal operating cycle;
2. Holds the liability primarily for the purpose of trading
3. To be settled within twelve months after the reporting period
4. The entity does not have an unconditional right to defer the settlement of the liability for at least twelve months after the
reporting period.
 Trade and other payables (accounts payable, notes payable, accrued interest, accrued expenses)
 Current provisions
 Short-term borrowings
 Current portion of long-term debt
 Current tax liability
non-current liabilities
 Non-current portion of long-term debt
 Finance lease liability
 Long-term deferred revenue
owner’s equity expenses net income (loss)
Also known as Net Is the decrease in The excess (deficit) of
Assets; it is the owner’s interest in economic benefit during the revenue over expenses for a given
or claim to, the assets of a business. accounting period in the form of an accounting period. Net income
It is the difference between the outflow or decrease in asset or increases owner’s equity while net
amount of assets and the amount of increase in liability that results in loss decreases owner’s equity.
liabilities. (OE = A – L) decrease in equity, other than (Revenue – Expenses = Net Income
distribution to equity participants. (Loss) )
Expenses encompasses losses.
income
Is increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in
liability that results in increase in equity, other than contribution from equity participants. Income encompasses revenue and gains.
Income is recognized when it is probable that an increase in economic benefits related to an increase in asset or a decrease in
liability has risen and that the increase in economic benefits can be measured reliably. Income recognition is present at the point of
sale subject to exceptions.
accrual basis of accounting vs cash basis of accounting
 Accrual – income is recognized when earned, and expenses are recorded when incurred.
 Matching concept
o Cause and effect association (cost of goods sold, sales commissions)
o Systematic and rational allocation (depreciation, amortization
o Immediate recognition (loss on sale of equipment, administrative expenses)
 Cash – income is recognized when cash is received, and expenses are recorded when paid.
measurement method
a. Historical cost – past purchase exchange price
b. Current cost – current purchase exchange price
c. Realizable value – current sale exchange price
d. Present value – future exchange price
 limitations of financial reporting
 It does not provide all the information
 Does not show the value of the entity but help the users to estimate the value of the entity
 Common information
 Based on estimate and judgment
qualitative characteristics
1. Fundamental Characteristics (substance and content)
a. Relevance (capacity to influence decisions
i. Predictive value
ii. Confirmatory value
iii. Materiality (relative size; size and nature of the item)
b. Faithful Representation
i. Neutral
ii. Complete (standard of adequate disclosure)
iii. Free from error
iv. Substance over form
2. Enhancing characteristics
a. Comparability
i. Intra and inter comparability
ii. Principle of consistency
b. Understandability
c. Verifiability
d. Timeliness
3. Cost- benefit principle
concept of capital and capital maintenance
concept of capital concept of capital maintenance
Capital is synonymous with net assets or net Profit is earned when the net asset at the end
worth (income statement approach) of the year is greater than the net assets at the beginning
of the year, exclusive of the contributions and distributions
of and to the owners respectively.
sources of capital
 Borrowed capital and contributed capital
 Accounting equation
the accounting process (cycle)
1. Analyze business transaction. 6. Prepare adjusted trial balance.
2. Prepare journal entries. 7. Prepare financial statements.
3. Post to T-accounts. 8. Prepare closing entries.
4. Prepare unadjusted trial balance. 9. Prepare post-closing trial balance.
5. Prepare adjusting entries. 10. Prepare reversing entries.
account
Is an accounting device used to classify and store information about the increases or decreases in a particular item.
chart of accounts
A list of all account titles and their account (code) numbers used for journalizing business transactions.
books of accounts
Are the accounting books where business transactions are recorded. It consists of general journal and the general
ledger.
1. General Journal – this is a two-column journal, which is called the book of original entry because this is the first book
where the business transactions are recorded.
2. General Ledger – this is called the book of final entry because this is the book where the business transactions are
finally recorded. The ledger serves the same purpose as the t-account but more formal and detailed.
 t-account
Used to show the increase or decrease in an account (item) caused by a transaction. It is convenient tool to analyze and
record the effect of transactions in a particular account (item).
Account Title
Debit Credit

rules of debit and credit

Debits and Credits are used to record the increases and decreases in each account affected by a business transaction.
Guide in the rules of debits and credits: Use accounting equation and identify the normal balance of the elements of financial
statements.
Assets = Liabilities + Owner’s Equity

Debit (normal balance) Credit (normal balance)

rules for asset accounts
 Add (increase) on the same side (debit)
 Subtract (decrease) on the opposite side (credit)
 The normal balance for an asset account is a debit balance.
Asset Account
Debit Credit
Increase + Decrease –
Balance
rules for liability and owner’s equity accounts
 Add (increase) on the same side (credit)
 Subtract (decrease) on the opposite side (debit)
 The normal balance for a liability or owner’s equity account is a credit balance.
Liability and Capital Account
Debit Credit
Decrease - Increase +
Balance
 ACCOUNTING
financial statements
examples of financial statements
 Income Statement is the presentation of the income of the company during operating
a period. It is also known as Statement of Financial Performance

L
A
Revenues P XXX C C
Expenses XXX
Profit/ Loss P XXX NC
 Statement of Changes in Equity financing
Beg. Equity
Add: Profit
Add: Investment
P XXX
XXX
XXX
NC E
Total XXX investing
Withdrawals XXX
Loss (if any) XXX
End. Equity P XXX > If there is no loss or profit: Breakeven

 Balance Sheet or Statement of Financial Position.

Current Assets and Current Liabilities = Operating Activities
- related to day to day operation
Non-Current Liabilities and Equity = Financing Activities
- related to borrowing money or payment of debt in cash.
Non-Current Assets = Investing Activities
- related to buying or selling long term assets.

 Statement of Cash Flow

Cash in (out) from Operating activities
Collection from customers P XXX
Payment of rent ( XXX )
Payment of supplies ( XXX )
Payment of utilities ( XXX )
Payment of telephone bill ( XXX )
Payment of salaries ( XXX )
Cash provided by (used in) Operating activities P XXX
Cash in (out) from Investing Activities
Acquisition of office equipment P XXX
Acquisition of photography equipment XXX
Cash provided by (used in) Investing activities P XXX
Cash in (out) from Financing activities
Initial cash investment P XXX
Withdrew cash for personal use ( XXX )
Cash provided by (used in) Financing activities P XXX
Increase (decrease) in cash during the period P XXX
Cash, Beginning –0–
Cash, Ending P XXX
 examples of assets examples of liabilities
{Current} Cash, Accounts Receivable, Supplies, {Current} Accounts Payable, Short-term Notes
Inventory, Prepaid Rent, Prepaid Payable, Unearned Service Income, Accrued Utility
Insurance, Short-term Investment, Expense, Accrued Salary, Dividends Payable,
Short-term Notes Receivable Interest Payable, Income Tax Payable
{Non-Current} Furniture and Fixtures, Land, {Non-Current} Loans Payable, Mortgage Payable,
Building, Equipment, Machinery, Intangible Assets Bonds Payable

examples of equity examples of revenue examples of expenses

Velasco, Capital, Velasco, Sales, Service
Drawing or Personal or Income/Revenue, Interest
Withdrawals Income/Revenue,
Professional Fees Earned
Rent Expense, Insurance
Expense, Salaries
Expense, Utilities Expense,
Advertising Expense, Cost
of Goods Sold,
Amortization Expense,
Depreciation Expense, Bad
Debts Expense, Supplies
Expense, Miscellanous
Expense

balance sheet { Assets = Liabilities + Equity } income statement { Revenue – Expense = Profit/Loss }
 ACCOUNTING
adjusting entries
adjusting entries
Usually prepared at the end of the reporting period to connect or adjust the balance of the accounts.
1. depreciaton – decrease in the value of a non current asset due to continuing use. (obsolescence, etc.)
Performing Adjusting Journal Entries (AJE)
Depreciation Expense P XX
Accumulated Depreciation P XX
note: Accumulated Depreciation account is a contra-asset with Credit normal balance. It is used to accumulate deprecation
expenses recorded from the date of acquisition of a non-current asset up to the end of its useful life.
Straight Line Method
This is the most commonly used method for depreciation. It has an annual depreciation formula of:
Annual Depreciation Expense = Annual Cost – Residual Value
Estimated Useful Life (in years)
note:: Acquisition Cost – amount paid to acquire a non-current asset.
Residual Value – amount that can be sold at the end of the useful life of a non-current asset; other terms
for residual value are salvage value and scrap value.
Estimated Useful Life – anticipated number of years that a non-current asset could be used.
Example
On June 1, 2019, an entity acquired Machinery for P 130,000. The machinery has a salvage value of P 10,000 with
estimated useful life of 10 years. The reporting period is December 31, 2019.
Requirement:
 Prepare the adjusting entries for depreciation at the end of 2019.
 What is the depreciation expense from 2019 to 2029?
 What is the accumulated depreciation from 2019 to 2029?
 What is the bank value of machinery on December 31, 2025?
Solution:
 Adjusting entries
2019
December 31 Depreciation Expense P 7,000
Accumulated Depreciation P 7,000
Computation:
Annual Depreciation Expense = P 130,000 – P 10,000 = P12,000
10 years
Depreciation Expense from June 1, 2019 to December 31, 2019 = P 12,000 x 7/12 = P 7,000
 depreciation expense
2019 (June 1 to December 31) = P 7,000
2020 to 2028 (January 1 to December 31) = P 12,000 each year
2029 (June 1 to May 31) = P 5,000
 accumulated depreciation
7,000 2019 = P 7,000
7,000 + 12,000 2020 = P 19,000
19,000 + 12,000 2021 = P 31,000
31,000 + 12,000 2022 = P 43,000
43,000 + 12,000 2023 January 1 = P 55,000
55,000 + 12,000 2024 To = P 67,000
December 31
67,000 + 12,000 2025 = P 79,000
79,000 + 12,000 2026 = P 91,000
91,000 + 12,000 2027 = P 103,000
103,000 + 12,000 2028 = P 115,000
115,000 + 5,000 2029 = P 120,000
  book value
= Cost – Accumulated Depreciation
= 130,000 – 79,000 (from June 1,2019 – December 31, 2015)
= P 51,000 12/31/25

accruals
2. accrued income / revenue – these are income already earned but not yet collected. It’s an asset account.
Adjusting Journal Entries
Receivable (or Accrued Income) P XX
Income or Revenue P XX
Example:
An entity rendered service of P 100,000. An entity rendered a promissory note with 12% interest rate
related to the transaction. The rate is dated November 1, 2019 and due on February 1, 2020.
Required:
 Prepare journal entries on the date of transactions and adjusting entries at the end of 2019.
Solution:
2019
November1 Notes Receivable P 100,000
Service Income P 100,000
#
AJE: December 31 Interest Receivable P 2,000
Interest Income P 2,000
Computation : I = Prt
I = (100,000) (12%) (2/12)
I = 12,000 x 2/12
I = 2,000
3. accrued expenses – these are expenses already incurred but not yet paid. It’s a liability account.
Adjusting Journal Entries
Expense P XX
Payable (or Accrued Expense) P XX
Example
The company has 5 employees who earn p 300 daily. Payroll is created every other saturday. Employees work
from monday to friday. The company’s employees work for a week ending on wednesday. (december 31)
Required
 Prepare adjusting journal entries at the end of the year for accrued salaries.
Solution
December 31 salaries expense p 4,500
Salaries payable p 4,500
Computation: 5 employees x 3 days x p 300 daily = p 4,500
Monday – Wednesday
deferrals
4. prepaid expenses – these are expense already paid but not yet used. Asset account.
Two methods on Prepaid Expenses
a. asset method (if the problem is silent)
b. expense method
Asset Method VS Expense Method
Original Entry: Prepaid Expense XX Original Entry: Expense XX
Cash XX Cash XX
AJE: Expense XX AJE: Prepaid Expense XX
Prepaid Expense XX Expense XX
Note: Compute the used/expired portion to compute the Note: Compute the unused/unexpired portion to compute the
amount of AJE. amount of AJE.
*AJE = no cash, just correcting accounts.

Example
The company paid rent in advance amounting P 500,000 good for 5 months on November 1, 2019.
Required
 If the company uses Asset Method, prepare journal entries (original entries) on the date of payment and AJE at the end
of the year.
 If the company uses Expense Method, prepare journal entries on the date of payment and AJE of the year.
Solution
Cut-off
Nov. 1, 2019 Nov. 30, 2019 Dec. 31, 2019 Jan. 31, 2020 Feb. 28, 2020 Mar. 31, 2020
Payment : P 50,000
Rent P 10,000 P 10,000 P 10,000 P 10,000 P 10,000
Expenses =
asset method expense method
2019 2019
OE: Nov. 1 Prepaid Rent P 50,000 OE: Nov. 1 Rent Expense P 50,000
Cash P50,000 Cash P50,000
AJE: Dec.31 Rent Expense P 20,000 AJE: Dec.31 Prepaid Rent P 30,000
Prepaid Rent P20,000 Rent Expense P30,000
{Used portion from Nov. 1, 2019 to Dec. 31, 2019} {Unused portion from Jan. 1, 2020 to Mar. 31, 2020}
t-accounts when you use asset method t-accounts when you use expense method
Cash Cash
DR CR DR CR
(Nov. 1) P 50,000 (Nov. 1) P 50,000
(Dec.31) P 50 000 (Dec.31) P 50 000

Prepaid Rent Prepaid Rent

DR CR DR CR
(Nov.1) P 50,000 (Dec 31) P 20,000 (Dec. 31) P 30,000
(Dec. 31) P 30,000
Rent Expense Rent Expense
DR CR DR CR
(Dec. 31) P 2,000 (Nov. 1) P 50,000 (Dec. 31) P 30,000
(Dec.31) P 20 000

5. unearned revenue (income) – these are income already collected but not yet earned. Liabilities account.
Two methods for Unearned Revenues
a. liability method
b. income (or revenue) method
Liability Method VS Income Method
Original Entry: Cash XX Original Entry: Cash XX
Unearned Income XX Income XX
AJE: Unearned Income XX AJE: Income XX
Income XX Unearned Income XX
Note: Compute the income/earned portion in preparing Note: Compute the liability/unearned portion in preparing AJE.
AJE.

Example
The company has a building for rent. The tenants paid the company amounting to P 60,000 good for 3 months on
December 1, 2019.
Required
 Prepare the joined entry (original entries) on Dec. 1, 2019 and the adjusting at the end of 2019 using the following
methods.
a. Liability Method
b. Income Method

Solution
Cut-off
December 1, 2019 December 31, 2019 January 31, 2020 February 28, 2020
Collection: P 60,000
P 20,000 P 20,000 P 20,000
Earned Portion Unearned Portion

liability method income method

2019 2019
Dec. 1 Cash P 60,000 OE: Nov. 1 Cash P 60,000
Unearned Rent Income P60,000 Rent Income P60,000
# #
: Dec.31 Unearned Rent Income P 20,000 AJE: Dec.31 Rent Income P 40,000
Rent Income P20,000 Unearned Rent Income P40,000

t- accounts using liability method t-accounts using income method

Cash Cash
DR CR DR CR
P 60,000 P 60,000

Unearned Rent Income Unearned Rent Income

DR CR DR CR
P 20,000 P60,000 P40,000
P40,000
Rent Income Rent Income
DR CR DR CR
P 20,000 P 40,000 P 60,000
P 20,000

6. bad debts expense – This is the amount of Accounts Receivable or claims from customers that is
estimated to be uncollected. Expense account. Other terms are: Doubtful Accounts Expense and Uncollective
Accounts Expense.
Two types of Adjusting Bad Debts:
a. allowance method
b. direct method
allowance method – this is the most common method used in determining bad debts. According to this method,
the amount of bad debts can be determined based on:
a. Percent of account receivable balance
b. Percent of accounts receivable based on aging
c. Percent of revenues or sales
AJE: Bad Debts Expense XX
Allowance for Bad Debts XX
note: Allowance for Bad Debts is a contra-asset account with credit normal balance.
 analysis of allowance for bad debts
Allowance for Bad Debts
DR CR
Beginning P XX
Bad Debts P XX Based on revenues/sales (AJE)
Ending P XX If based on AR (required balance). If based on aging of AR
(required balance)
Example
Aster Company has the following accounts:
Accounts Receivable P 100,000
Allowance for Bad Debts P 2,500
Sales P 1,500,00
Required
Prepare the adjusting entries for Doubtful Accounts using the Allowance Method for each of the following
independent cases:
a. 5% of Account Receivable based on aging of P 80,000 is estimated to be doubtful
b. 2.5% of Accounts Receivable based on aging of P 80,000 is estimated to be doubtful
c. 0.2% of Sales is estimated to be doubtful
Solution
a. Based on AR
AJE: Doubtful Accounts Expense P 2,500
Allowance for Doubtful Accounts P 2,500
Allowance for Doubtful Accounts
DR CR
Beginning P 2,500
P 2,500 AJE
5% x P 100,000 Ending P 5,000

b. Based on Aging of AR
AJE: Allowance for Doubtful Accounts 500
Doubtful Accounts Expense 500
Allowance for Doubtful Accounts
DR CR
P 500 Beginning P 2,500
Ending P2,500 2.5% x P 80,000

c. Based on Sales
AJE: Doubtful Accounts Expense 3000
Allowance for Doubtful Accounts 3000
Allowance for Doubtful Accounts
DR CR
P 500 Beginning P 2,500
D.A. Exp. P 3,000
Ending P5,500 0.2% x P 1,500,000

direct method – bad debts are recorded when determined to be worthless. No adjusting entries for
estimation of bad debts.
AJE: Bad Debts Expense P XX
Accounts Receivable P XX
 Example
On December 31, 2019, Aster Company shows the following accounts.
DR CR
Accounts Receivable P 200,000
Allowance for Bad Debts 2,000
Sales P 1,000,000
Required
Prepare adjusting entries for Bad Debts using the following method.
a. Allowance Method (2.5% of AR is estimated to be uncollectible)
b. Direct Method (3% AR is determined to be uncollectible)
Solution
a. Allowance method
AJE: Bad Debts Expense 7,000
Allowance for Bad Debts 7,000
Allowance for Bad Debts
DR CR
Beginning P 2,000 P 7,000
Ending P 5,000 2.5% x P 200,000

b. Direct method
AJE: Bad Debts Expense 6,000
Accounts Receivable 6,000
Computation: P 200,000 x 3% = P6,000
note: No entry on estimation of bad debts.
free on board (fob)
fob destination: freight costs are charged to the seller
fob shipping point: freight costs are charged to buyer
Who should pay the shipper? Who actually paid the shipper?
FOB Destination Seller
FOB Shipping Point Buyer
Freight Collect Buyer
Freight Prepaid Seller

seller >> FOB Destination – record a debit to “Freight Out”

FOB Shipping Point – X
buyer >> FOB Destination – X
FOB Shipping Point – record a debit to “Freight In”
 ACCOUNTING
closing entries and reversing entries
closing entries – these are entries used to determine the result of operations. These are used by debiting
normal accounts and credit balances and crediting nominal accounts with debit balances.
nominal accounts
Are temporary account that are subject to closing entries. Example of nominal account with credit balance is
Revenues and nominal account with debit balance is Expenses.
closing entries
Revenues/Income (in detail) P XX
Income Summary P XX
To close nominal accounts with credit balances.
#
Income Summary XX
Expenses (in detail) XX
To close nominal accounts with debit balances.
#
If the result of the operation is profit, the closing entries will be:
Income Summary XX
Velasco, Capital XX
To close profit to capital.
#
Entries to close withdraw accounts:
Velasco, Capital XX
Velasco, Withdrawals XX
#
note: Income Summary account is also a nominal/temporary account that will be closed to capital account. If the
balance of Income Summary is credit after closing revenues and expenses the result is profit. On the other hand, if the
balance of income summary is debit the result is net loss.

post-closing trial balance – these are balances that remained after closing profit or loss and drawing
account. Meaning, the remaining accounts are assets, liabilities, and equity, which are called permanent accounts. Post-
closing trial balance shall be used for the next accounting period.
permanent accounts
Are accounts (A, L, Eq) that are not subject to closing entries.
Reversing entries – these are entries used to maintain the method used by the company. Reversing entries are actually
the opposite entries of adjusting entries but not all adjusting entries are subject to reversing entries. Reversing entries
are recorded every first day of the next accounting period. (e.g. January 1, 2020)
Four adjusting entries that are subject to reversing entries:
a. Accrued Income (Accrual)
b. Accrued Expense (Accrual)
c. Unearned Income (Income Method only)
d. Prepaid Expense ( Expense Method only)
pre-forma reversing entries
a. Accrued Income c. Unearned Income
Income XX Unearned Income XX
Receivable XX Income XX
To reverse accrued income. To reverse unearned income.
b. Accrued Expense d. Prepaid Expense
Payable XX Expense XX
Expense XX Prepaid Expenses (Cash) XX
To record accrued expense. To reverse prepaid expense