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Documente Cultură
Study Guide in
Introductory
Accounting for
Service Business
Benedick Manalaysay
Accountancy Department
De La Salle University – Manila
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TABLE OF CONTENTS
1 Introduction to Accounting 3
2 Transaction Analysis 12
4 Financial Statements 29
6 Correcting Entries 38
7 Payroll Accounting 40
9 Accrued Income 52
10 Accrued Expense 55
11 Prepaid Expense 58
12 Unearned Income 62
13 Depreciation 66
14 Doubtful Accounts 71
16 Reversing Entries 82
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LESSON 1
INTRODUCTION TO ACCOUNTING
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Learn the history of accounting
2 Define accounting
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Objective 1
History of Accounting
Accounting has a long history. Some scholars claim that writing arose in order to record
information. Account records date back to the ancient civilizations of China, Babylonia, Greece
and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labor and
materials used in building structures like the great pyramids. (Source: Horngren, Harrison and
Robinson, 1995)
Accounting developed as a result of the information needs of merchants in the city-states of Italy
during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematician and friend of
Leonardo da Vinci, published the first known description of double-entry bookkeeping entitled
Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Everything about
Arithmetic, Geometry, and Proportion published in Venice in November 1494. This book
contained primarily principles of mathematics and incidentally a set of accounting procedures.
The pace of accounting development increased during the Industrial Revolution as the economies
of developed countries began to mass-produce goods. Until that time, merchandise was priced
based on managers’ hunches about cost but increased competition required merchants to adopt
more sophisticated accounting system.
In the nineteenth century, the growth of corporations especially those in the railroad and steel
industries, spurred the developed of accounting. Corporate owners were no longer necessarily the
managers of their business. Managers had to create accounting systems to report to the owners
how well their businesses were doing.
Government played a role in leading more development in the field of accounting when it started
using the income tax. Accounting supplied the concept of income. Also, government at all levels
has assumed expanded roles in health, education, labor and economic planning. To ensure that the
information that it uses to make decisions is reliable, the government has required strict
accountability in the business community.
At the beginning of the third millennium, there would still be significant developments in the
field of accounting. The great challenge of globalization and the effects of new technologies (e.g.
super computers, robotics, inter and intra-net, etc.) pose a shift in the structure and pattern in this
field. More and better accounting information are now being required and therefore, accounting,
being the means used in communicating business and financial information, must also evolve into
a more efficient level.
With these objectives, a business must prepare financial reports and interpret these reports as an
aid in decision-making. In making decisions, accounting is used as a tool for communication.
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Objective 2
Definition of Accounting
1. Accounting is a service activity.
a. Its function is to provide quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic
decisions.
Objective 3
Difference between Bookkeeping and Accounting
Bookkeeping Accounting
Recording of transactions Recording of transactions
Preparing financial reports Preparing financial reports
Analyzing financial reports
Decision-making
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Objective 4
Branches of Accounting
4. Taxation – deals with the study of provisions of the law with regard to Philippine taxation
system and proper computation of taxes such as income tax, value-added tax, withholding
tax and other taxes.
Objective 5
Forms of Business Organizations
1. According to ownership
a. Sole-proprietorship – owned by only one person called sole-proprietor
b. Partnership – owned by 2 or more persons called partners
c. Corporation – owned by 5 or more persons called shareholders
2. According to activity
a. Service – renders services to the public such accounting firms, law firms,
consulting firms, SPA, medical clinics, dental clinics, schools etc
b. Merchandising – buys and sells merchandise to the public
c. Manufacturing – buys raw materials and converts them into finished goods to be
sold to the public
Objective 6
Certified Public Accountant (CPA)
- is an accounting professional doing accounting, audit, tax, management consulting,
education and research work.
- Types of Accountants
o Private Accountant / Management Accountant
is an accounting professional employed in a private company or
organization
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Objective 7
Government Agencies and Professional Bodies
1. Bureau of Internal Revenue (BIR) – agency in charge of proper collection of taxes from
the public
3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines – agency in charge
of regulating Philippine bank operations, setting Philippine monetary policies etc.
10. City Hall and Baranggay – these political subdivisions issues business permits and
collects business taxes.
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Objective 8
Business Documents
Objective 9
Financial Statements
- Shows the results of the recording of the business transactions and are expressed in terms
of assets, liabilities, equity, income and expenses.
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Objective 10
Basic Accounting Concepts / Assumptions
1. Entity
a. Under this concept, the business enterprise is viewed as separate from the
owners, managers, and employees of the business (Valix, 2005)
2. Time period
a. This concept requires that the indefinite life of an enterprise is subdivided into
time periods which are usually of equal length (Valix, 2005)
b. Calendar year is a 12-month period that ends on December 31, otherwise it is
called Natural business year or Fiscal year (Valix, 2005)
3. Monetary unit
a. This concept assumes that financial transactions be measured in terms of money
or currency of the Philippines
4. Cost
a. This concept requires that assets should be recorded initially at original
acquisition cost (Valix, 2005)
5. Adequate disclosure
a. This concept requires that all significant and relevant information leading to the
preparation of financial statements should be clearly reported (Valix, 2005)
6. Materiality
a. This concept relates to the significance of an item to the overall presentation of
the financial statements. Information is material if its omission could influence
the economic decision of the users of the financial statements (Valix, 2005)
7. Accrual
a. This concept requires the income earned must be recognized in the financial
statements whether cash is received or not.
b. This concept also requires the expenses incurred must be recognized in the
financial statements whether cash is paid or not.
c. Because of this concept, organizations are preparing adjusting journal entries to
recognize accrued income and accrued expenses.
d. Accrued income refers to income earned but not yet received.
e. Accrued expense refers to expense incurred but not yet paid.
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8. Consistency
a. This concept requires that the accounting methods and practices should be
applied on a uniform basis from one time period to another (Valix, 2005).
9. Comparability
a. There are 2 kinds of comparability: Comparability within an enterprise and
Comparability between enterprises (Valix, 2005)
b. Comparability within an enterprise is the quality of information that allows
comparisons within a single enterprise from one time period to the next (Valix,
2005)
c. Comparability between enterprises is the quality of information that allows
comparisons between two or more enterprises engaged in the same industry
(Valix, 2005)
13. Matching
a. This concept requires that costs and expenses incurred in earning a revenue
should be reported in the same period when the revenue or income is earned
(Valix, 2005)
14. Conservatism
a. Under this concept, when alternatives exist, the alternative which has the least
effect on net income or owner’s equity should be chosen (Valix, 2005)
b. Conservatism is synonymous with Prudence. Prudence is the desire to exercise
care and caution when dealing with the uncertainties in the measurement process
such as assets or income are not overstated and liabilities or expenses are not
understated (Valix, 2005)
15. Objectivity
a. This concept requires that financial transactions that were recorded be supported
by business documents
Objective 11
Other Terms
Liquidity Solvency
- Refers to the ability of the organization - Refers to the ability of the organization
to pay its short-term (current) to pay its long-term (noncurrent)
obligations obligations
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 2 – 11, 21, 25, 29 – 31, 92 – 94
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 2
TRANSACTION ANALYSIS
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Define the accounting equation and know the effects of
the financial transactions on the accounting equation
Objective 1
The Accounting Equation
The equation states that business assets are financed by two parties. They are the creditors or
vendors (liabilities) and the owner (capital).
Income will increase assets as well as capital and expenses will decrease assets as well as capital.
Business transactions will have an effect on the accounting equation. The following are the basic
financial transactions and the effects on the accounting equation.
Interest
Payment of the principal ▼ ▼ ▼ expense
and interest of the
promissory note
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Purchase of short-term ▲▼
investment for cash
Gain on sale
Sale of short-term ▲▼ ▲ of investment
investment at a gain in trading
securities
Loss on sale
Sale of short-term ▲▼ ▼ of investment
investment at a loss in trading
securities
Cash advance to an ▲▼
employee
Purchase of supplies on ▲ ▲
account
Gain on sale
Sale of a fixed asset at a ▲▼ ▲ of equipment
gain
Loss on sale
Sale of a fixed asset at a ▲▼ ▼ of equipment
loss
Service
Rendered services for cash ▲ ▲ Income
Service
Rendered services on ▲ ▲ Income
account
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Commission
Received cash for ▲ ▲ Income
commission income
Expense
Payment of expenses for ▼ ▼
cash
Objective 2
Types of Accounts
ASSETS
CASH This includes bills PETTY CASH FUND Cash used to pay
and coins, bank petty or small
check, bank amount of
accounts. expenses.
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COMMISSION
RECEIVABLE
RENT RECEIVABLE
PREPAID
INSURANCE
PREPAID
ADVERTISING
PREPAID
SUBSCRIPTIONS
OFFICE SUPPLIES
STORE SUPPLIES
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MACHINERY
ACCUMULATED Is a Contra-asset
DEPRECIATION account that
represents
cumulative
depreciation for
depreciable fixed
assets
LIABILITIES
DISCOUNT ON Is a Contra-liability
NOTES PAYABLE account that
represents
unamortized
interest on the
promissory note
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UNEARNED RENT
UNEARNED
ADVERTISING
UNEARNED
SUBSCRIPTIONS
UNEARNED
COMMISSION
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property
INCOME
EXPENSES
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RENT EXPENSE
ADVERTISING
EXPENSE
REPAIR AND
MAINTENANCE
EXPENSE
SUPPLIES EXPENSE
INSURANCE
EXPENSE
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MISCELLANEOUS
EXPENSE
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 14 – 20, 26 – 27, 159 – 164
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 3
GENERAL JOURNAL, GENERAL LEDGER TRIAL BALANCE
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Know the concept of double-entry bookkeeping and the
appropriate accounting tool for financial transactions
Objective 1
Double-entry Bookkeeping
This concept uses the tools debit and credit to record financial transactions. Further, this concept
dictates that “for every debit, there is at least one credit and vice-versa”.
The table shows the appropriate accounting tool for the effects of the financial transactions on
assets, liabilities, capital, income and expenses.
Increase Decrease
Objective 2
Journalizing
This refers to the process of recording the financial transactions in the General Journal. General
Journal is also known as “Book of Original Entry”.
Adapted from Exercise 6-8 of Workbook in Introductory Accounting for Service Business
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Journalize the following selected transactions of MJ Dry Cleaning. The following transaction
occurred during June 2010.
1 MJ Flores invested in the business the following: P 250,000 cash and P 420,000 worth of
dry cleaning equipment with fair value of P 400,000 but with existing liability of P
100,000 which is to be assumed by the business
2 Purchased dry cleaning supplies from Wilson Cleaners for P 22,100, payable after 20
days
4 Bought cash register from Carter Equipment, P 45,800. Terms: 30% down payment,
balance on account
7 Dry cleaning services rendered for the week totaled P 25,250 cash
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Objective 3
Posting
This refers to the process of transferring the debit and credit amounts to the appropriate ledger
accounts. Ledger accounts are placed in a financial book called General Ledger. This is also
known as “Book of Final Entry”. After the amounts have been posted, one should post the ledger
account number back to the general journal. This process is known as “cross-referencing”.
Chart of Accounts
This chart lists the account titles to be used by the business and the related account numbers. The
following is a typical example of chart of accounts.
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CASH 101
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Assets Debit
Contra-assets Credit
Liabilities Credit
Contra-liabilities Debit
Capital Credit
Drawing Debit
Income Credit
Expenses Debit
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Objective 4
Trial Balance
This refers to the summary of balances in the ledger accounts. The accounts are arranged in the
order of assets, liabilities, equity, income and expenses.
Debit Credit
Cash P 56 300
Accounts Receivable 77 500
Office Supplies 2 100
Prepaid Insurance 2 200
Office Equipment 120 000
Accounts Payable P 23 020
Notes Payable 15 000
Simone Patrice, Capital 172 880
Simone Patrice, Drawing 2 000
Consulting Fees 253 000
Salaries and Wages Expense 168 200
Rent Expense 11 000
Transportation Expense 7 800
Utilities Expense 8 200
Advertising Expense 5 500
Miscellaneous Expense 3 100 _______
A balanced trial balance means that journal entries are properly posted and ledger accounts are
properly balanced.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 46 – 56, 57 – 73
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 4
FINANCIAL STATEMENTS
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the procedures in preparing the income
statement
Objective 1
Income Statement
To recall, the Income Statement presents the financial performance of the business through its
income and expenses.
Net Income refers to the excess of income over expenses, otherwise it is called Net Loss.
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Objective 2
Statement of Changes in Owner’s Equity
To recall, this component presents the changes in capital such as additional investments,
withdrawals, net income and/or net loss.
EFFECTS
Investment Increase
Withdrawal Decrease
Income Increase
Expense Decrease
Net Income Increase
Net Loss Decrease
The Income Statement is connected to this component through Net Income or Net Loss and this
component is connected to the Balance Sheet through the Ending balance of the capital account.
Using the accounting equation, the equation for computing Beginning Capital Balance is
On the other hand, the alternative equation for Ending Capital Balance is
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Objective 3
Balance Sheet or Statement of Financial Position
To recall, the Balance Sheet presents the financial condition of the business through its assets,
liabilities and capital / owner’s equity
Assets
Assets are classified into 2:
1. Current Assets
a. These refer to assets that are useful to the business within one year. Examples are
Cash, Investment in Trading Securities, Trade and Other Receivables,
Merchandise Inventory and Prepaid Expenses.
2. Noncurrent Assets
a. These refer to assets that are useful to the business for more than one year.
Examples are Property, Plant and Equipment, Long-term investments and
Intangible assets.
Assets are arranged in order of liquidity. Cash is the first line item because it is the most liquid
asset.
Liabilities
Liabilities are classified into 2:
1. Current liabilities
a. These refer to liabilities that are payable and will mature within one year.
Examples are Trade and Other Payables and Current-portion of long-term notes
payable.
2. Noncurrent liabilities
a. These refer to liabilities that are payable and will mature beyond one year.
Examples are Noncurrent-portion of long-term notes payable, Mortgage Payable,
and Bonds Payable.
Liabilities are arranged in order of maturity. For Noncurrent liabilities, the order is usually Notes
Payable, Mortgage Payable and Bonds Payable. The reason is Notes Payable will normally
mature first before mortagage and bonds.
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Objective 4
Notes to the Financial Statements
To recall, this component presents the details of the line items in the Balance Sheet and Income
Statement
After Allowance for Doubtful Accounts, the next line item is Notes Receivable then followed by
account titles which have the word “Receivable”. They are arranged from highest to lowest since
their nature are the same. “Receivable” accounts are synonymous with “Accrued Income”. For
example, Interest receivable is the same with Accrued Interest Income.
Prepaid Expenses
The items for this category are arranged from highest to lowest since their nature are the same.
The fixed asset items are arranged from highest acquisition cost to lowest acquisition cost. The
difference between the acquisition cost and accumulated depreciation is called the Net carrying
value or Net book value.
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Line Item
1st Accounts Payable
2nd Notes Payable
3rd Discount on Notes Payable
4th – nth Account with the word “Payable”
Last Unearned income
For the 4th line item, the accounts are arranged from highest to lowest since their nature are the
same. “Payable” accounts are synonymous with “Accrued Expense”. For example, Rent payable
is the same with Accrued Rent expense.
Objective 5
Problems in connection to Statement of Changes in Owner’s Equity
1. A firm has just completed its first year of operations. During the year, the owner
withdrew P 50,000 and by the end of the year his equity stood at P 70,000, which
was a P 10,000 increase from his initial investment. If revenues generated during
the year totaled P 400,000, then expenses incurred during the year must have been
______________.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 21 – 24, 12 – 13
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 5
STATEMENT OF CASH FLOWS
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Recall the definition of Statement of Cash Flows and
classify the transactions as operating activity, investing
activity and financing activity
Objective 1
Statement of Cash Flows
To recall, the Statement of Cash Flows presents the cash inflows and outflows of the business
through its operating, investing and financing activities.
Business Activities
1. Financing activities
a. These activities pertain to transactions such as
i. Investments of the owner
ii. Loans whether short term or long term
iii. Withdrawal of the owner
iv. Payment of the principal of the loans
2. Investing activities
a. These activities pertain to transactions such as
i. Sale of property, plant and equipment
ii. Purchase of property, plant and equipment
3. Operating activities
a. These activities pertain to transaction such as
i. Payment of the interest of the loans
ii. Other transactions not enumerated above
Objective 2
Connection of the Statement of Cash Flows to the Balance Sheet
The ending cash balance in the Statement of Cash Flows represents the cash balance in the
Balance Sheet.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 718 – 726
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 6
CORRECTING ENTRIES
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Know the different accounting errors
Objective 1
Accounting Errors
1. Transposition error
a. Error in the position of figures. Example: 123 is written as 132
2. Transplacement error / Slide
a. Error in the placement of decimal point. Example: 1000.90 is written as 100.09
Objective 2
Correcting journal entries
- entries to correct incorrect journal entries
On September 15, a temporary withdrawal of P 12,000 by X, the owner was recorded as a debit to
Salaries and Wages Expense and a credit to Cash. The correcting entry was made at month-end.
Recorded entry
Correct entry
Correcting Entry
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 68 – 69, 156 – 158
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 7
PAYROLL ACCOUNTING
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the concept of employee benefits and
compensation and the related terms such as Payroll
Register and payroll deductions
Objective 1
Employee Compensation and Benefits
Organizations normally monitor the attendance of the employees through time clock cards. These
cards show the time in and time out of the employees. Further, organizations also prepare and
distribute pay slips. These slips show the gross salary of an employee and the related deductions.
The normal deductions from the gross salary are SSS, Philhealth, Pag-IBIG, Withholding tax and
Cash advances.
Organizations also prepare the Payroll Register which shows the summary of the employees’ pay
slips.
Employee Gross Overtime, Total SSS Philhealth Pag- Withholding Cash Net
Name Salary Bonus and Salary IBIG Tax Advance Salary
Other
Benefits
Alpha
Beta
Charlie
TOTAL
Objective 2
Payroll Example and Journal Entries
Assume Total gross salaries and wages is P 200,000, Total withholding taxes payable is P 20,000,
and Total advances to employees is P 10,000
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Employer Contributions
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Further Readings
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
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LESSON 8
ACCOUNTING FOR PROMISSORY NOTES
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the concept of promissory notes and its parts
and prepare the journal entries in relation to issuance of
promissory notes and payment on the maturity date
Objective 1
Promissory Notes
A promissory note is an unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain
in money to order or to bearer (Valix, 2005).
(Sgd) Y
Given the above promissory note, how much is the Maturity value?
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Term refers to the period between the date of the note and the maturity date. 360 represents the
number of days in a year in accordance to Banker’s rule.
In the above example the term is 14 days. 7 days in March (31-24) and 7 days in April.
For years 2000, 2004, 2008 and so on, remember that there are 29 days in February.
Journal Entries
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Maturity Date
Maturity Date
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Objective 2
Discounting of Customer’s note
Using the above example, assume that the maker discounted the note on April 2 at a discount rate
of 15%.
Discount period refers to the period between the discount date and the maturity date.
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Discount Date
On the discount date, the payee needs to inform the maker that the note is discounted. On the
maturity date, the maker should directly pay to the bank or financing company.
Maturity Date
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Types of endorsement
1. Endorsement with recourse
a. This type requires the endorser to pay the endorsee if the maker dishonors the
note. This is the contingent or secondary liability of the endorser.
In the absence of any evidence to the contrary, endorsement is assumed to be with recourse
(Valix, 2005).
Assume that in the above example, the maker dishonored the note and the bank charged a
protest fee of P 500.
Maturity Date
Principal P 5,000
Interest 23
Protest fees 500
Total payment P 5,523
======
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Objective 3
Discounting of own note
In this type of discounting, the maker issues a promissory note to obtain cash. Interest on
discounting is deducted in advance and is debited using the account title “Discount on Notes
Payable”.
Example 1:
On July 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000 note with Y.
Discount Date
Maturity Date
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Example 2:
On December 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000 note
with Y. The accounting period ends on December 31.
Year-end amortization
Discount Date
Books of the Maker
Amortization at year-end
Books of the Maker
Presentation
Maturity Date
Books of the Maker
Interest expense 43
Discount on note payable 43
Amortization of discount
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 396 – 400, 473 – 474
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 9
ACCRUED INCOME
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the concept of adjusting entries and the
reasons for providing adjusting entries at year-end
Objective 1
Adjusting Entries
Adjusting entries refer to journal entries made at the end of the year for the following reasons:
1. Accrued income
a. There may be unrecorded income and there is a need to accrue income or
recognize receivables.
2. Accrued expense
a. There may be unrecorded expenses and there is a need to accrue expenses or
recognize payables.
3. Prepaid expense
a. There may be a consumed or used portion in the recorded prepaid expense or
there may be an unconsumed or unused portion in the recorded expense.
4. Unearned income
a. There may be an earned portion in the recorded unearned income or there may be
an unearned portion in the recorded income.
5. Depreciation
a. There is a need to provide depreciation for depreciable fixed assets.
6. Doubtful accounts
a. There is a need to provide estimated doubtful accounts in relation to accounts
receivable.
Objective 2
Accrued income
To recall, accrued income refers to income earned but not yet received. The following are the
examples of accrued income to be recognized at year-end:
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a. It is possible that the company or lessor has already earned the rent but it has not
yet received the rent payment as of year-end.
3. Accounts receivable
a. It is possible that the company has not yet recorded as of year-end the service
rendered.
4. Accrued interest income
a. It is possible that the company has not yet recorded the interest that is earned in
relation to notes receivable from the date of the promissory note until year-end
date.
Pro-forma Entry
Example 1:
A company leases an office space for P 14,000 per month. As of December 31, 2009, company’s
year-end, the tenant has not yet paid its rent for two months.
Adjusting entry
Example 2:
As of December 31, 2009, ABC Hotel has generated lodging revenue of P 127,000 from guests
whose payments are not yet received until they check out.
Adjusting entry
If the company did not recognize accrued income at year-end, then the financial statements will
be misstated showing understated assets and understated income.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 95 – 96, 103 – 104
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 10
ACCRUED EXPENSE
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Recall the concept of accrued expense and prepare
adjusting entry in relation to accrued expense
Objective 1
Accrued expense
To recall, accrued expense refers to expense incurred but not yet paid. The following are the
examples of accrued expense to be recognized at year-end:
Accrued expense is the opposite of accrued income. When one party recognize accrued income,
the other party should recognize accrued expense.
Pro-forma Entry
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Example 1:
Property taxes for three months estimated to total P 13,300 have accrued.
Adjusting entry
Example 2:
Electricity consumption for the month of December amounting to P 7,100 is not yet paid.
Adjusting entry
If the company did not recognize accrued expense at year-end, then the financial statements will
be misstated showing understated liabilities and understated expense.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 104 – 108
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 11
PREPAID EXPENSE
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Recall the concept of prepare expense and prepare
adjusting entry using the Asset method
Prepaid expense
To recall, prepaid expense is an asset that is paid in advance but not yet consumed or used.
Companies have two options or methods in recording prepaid items. They may use the Asset
method or the Expense method.
Objective 1
Asset Method
If the company chooses to use the Asset method, then upon purchasing the prepaid item the pro-
forma entry will be:
It is possible that in this recorded prepaid expense there may be consumed or used portion. To
adjust the recorded prepaid expense, the pro-forma entry will be:
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Example:
On March 15, 2009, XYZ Company purchased office supplies for cash, P 100,000. At the end of
the year, record shows that 25% worth of supplies have been used.
Adjusting entry
If the prepaid expense account is not adjusted at year-end, then the financial statements will be
misstated showing overstated assets and understated expenses.
If the adjusted Office supplies of P 75,000 is fully consumed in the following year, then the entire
P 75,000 will be transformed to Office supplies expense also in the following year.
Objective 2
Expense Method
On the other hand, if the company chooses to use the Expense method, then the pro-forma entry
to record the purchase of prepaid item is:
It is possible that in this recorded expense there may be unconsumed or unused portion. To adjust
the recorded expense, the pro-forma entry will be:
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Example:
Assume the same example in asset method but this time the company will use the expense
method.
Adjusting entry
If the expense account is not adjusted at year-end, then the financial statements will be misstated
showing understated assets and overstated expenses.
Notice that whether the company uses the asset method or expense method, the financial
statements will show same amounts for assets and expenses. In the above example, both methods
will show Office supplies adjusted balance of P 75,000 and Office supplies expense adjusted
balance of P 25,000.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. 96 – 100, 115 – 117
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 12
UNEARNED INCOME
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Recall the concept of unearned income and prepare
adjusting entry using the Liability method
Unearned income
To recall, unearned income is a liability that is received in advance but not yet earned.
Unearned income is the opposite of prepaid expense. If one party has recorded a prepaid item,
then the other party has to record an unearned item.
Companies have two options or methods in recording unearned items. They may use the Liability
method or Income method.
Objective 1
Liability Method
If the company chooses to use the liability method, then upon receiving the unearned item the
pro-forma entry will be:
It is possible that in this recorded unearned income there may be earned portion. To adjust the
recorded unearned income, the pro-forma entry will be:
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Example:
On October 1, 2009, the company received from the tenant the advance rent payment of P
100,000 representing 10-month rent.
Adjusting entry
If the unearned income account is not adjusted at year-end, then the financial statements will be
misstated showing overstated liabilities and understated income.
If the adjusted Unearned rent income of P 70,000 is fully earned in the following year, then the
entire P 70,000 will be transformed to Rent income also in the following year.
Objective 2
Income Method
On the other hand, if the company chooses to use the Income method, then the pro-forma entry to
record the unearned item is:
It is possible that in this recorded income there may be unearned portion. To adjust the recorded
income, the pro-forma entry will be:
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Example:
Assume the same example in liability method but this time the company will use the income
method.
Adjusting entry
If the income account is not adjusted at year-end, then the financial statements will be misstated
showing understated liabilities and overstated income.
Notice that whether the company uses the liability method or income method, the financial
statements will show same amounts for liabilities and income. In the above example, both
methods will show Unearned rent income adjusted balance of P 70,000 and Rent income adjusted
balance of P 30,000.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 100 – 103, 117 – 118
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 13
DEPRECIATION
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the concept of depreciation and its kinds
Objective 1
Concept of depreciation
Property, plant and equipment, except land, normally are usable for a number of years after which
they have relatively little value either for service or for sale. The difference between the original
cost of a property and any remaining value when it is retired or worn out is an expense that
should be distributed to the periods during which the asset is used (Valix, 2000).
Depreciation accounting
- Is a system of accounting which aims to distribute the cost of the depreciable fixed asset
less salvage value, if any, over the estimated useful life of the asset in a systematic and
rational manner. It is a process of allocation, not of valuation (Valix, 2000).
- The objective of depreciation accounting is to have each period benefitting from the use
of the asset bear an equitable share of the asset cost (Valix, 2000).
Depreciation
- Is the portion of the cost of the asset charged as expense during an accounting period
(Valix, 2000).
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Objective 2
Factors of depreciation (Valix, 2000)
In order to properly compute the amount of depreciation to be charged as expense during an
accounting period, three factors are necessary, namely:
1. Cost
2. Scrap value
a. Is the amount estimated to be recovered when the asset is retired from use.
b. It is also known as Residual value or Salvage value.
c. From the practical standpoint, the scrap value is often considered as zero because
the valuation is usually very small or not capable of estimation.
3. Estimated useful life
a. Is the expected service or economic life of the asset.
The formula for the computation of the annual depreciation following the straight line method is
as follows:
Annual depreciation =
Cost minus scrap
Life in years
Cost minus scrap value equals Depreciable cost. Depreciable cost multiplied by the Annual
depreciation rate also gives the amount of annual depreciation.
The Annual depreciation rate is determined by dividing 100% by the life of the asset in years. For
example, if the life of the asset is 5 years, then the depreciation rate is 20% (100% / 5).
The straight line method is based on the theory that periods benefited by the use of the asset
should bear an equal or equitable share of the asset cost because the straight line approach
considers depreciation as a function of time rather than as a function of usage.
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Example:
Assume the following data for 2011
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 422 – 431, 435 – 436
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 14
DOUBTFUL ACCOUNTS
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the concept of doubtful accounts
Objective 1
Accounting for Doubtful Accounts
Business enterprises sell on credit rather than only for cash to increase total service income or
sales and thereby increase income. However, an enterprise that sells on credit assumes the risk
that some clients or customers will not pay their accounts (Valix, 2005).
When an account becomes uncollectible, the enterprise has sustained a bad debt loss. This loss is
simply one of the costs of doing business on credit. Two methods are followed in accounting for
this bad debt loss, namely:
1. Allowance method
2. Direct write-off method
Allowance method
The allowance method requires recognition of doubtful accounts expense even if some of the
accounts receivable are doubtful of collection.
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Objective 2
Percent of Accounts receivable balance
A certain rate is multiplied to the accounts receivable balance in order to get the required
allowance balance. The rate used is usually determined from past experience of the company
(Valix, 2005).
Example 1:
Assume accounts receivable balance of P 2,000,000 and doubtful accounts are estimated to be 3%
of accounts receivable are given in 2009 financial records
Adjusting entry
Example 2:
Assume accounts receivable balance of P 2,000,000 and doubtful accounts are estimated to be 3%
of accounts receivable are given in 2010 financial records. Assume also that Allowance for
doubtful accounts has a balance of P 10,000 before adjustment.
Adjusting entry
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Objective 3
Aging analysis
The aging of accounts receivable involves an analysis of the accounts where they are classified
into not due or past due. Past due accounts are further classified in terms of the length of the
period they are past due. The most common classifications are:
1. Not due
2. 1 to 30 days past due
3. 31 to 60 days past due
4. 61 to 90 days past due
5. 91 to 120 days past due
6. 121 to 180 days past due
7. 181 to 365 days past due
8. More than 1 year past due
9. Bankrupt or under litigation
The allowance is then determined by multiplying the total of each classification by the rate or
percent loss experienced by the company for each category.
The major argument for the use of this method is the more accurate and scientific computation of
the allowance for doubtful accounts, and consequently, the accounts receivable are fairly
presented in the balance sheet at net realizable value (Valix, 2005).
Example:
The following data are summarized in aging the accounts at the end of the period:
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The amount computed by aging of accounts receivable represents the required allowance for
doubtful accounts at the end of the period.
Thus, if the Allowance for doubtful accounts has a credit balance of P 10,000 before adjustment,
the doubtful accounts expense is determined as follows:
Adjusting entry
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 387 – 388, 391 – 393, 105 – 118
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Confidentiality Requirement
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LESSON 15
CLOSING ENTRIES, POST-CLOSING TRIAL BALANCE
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the concept of closing entries and prepare
closing entries
Objective 1
Closing entries
After the preparing the financial statements, one needs to close the nominal accounts or income
statement accounts. If these accounts are not closed at the end of the year, then these accounts
will be carried forward to the next accounting period. If that happens, the following accounting
period will show a misstated income statement.
1. Debit the income accounts and credit the Income summary account.
Closing entry
2. Debit the Income summary account and credit the expense accounts.
Closing entry
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3. Close the Income summary account to the Owner, drawing account. If the Income
summary has a credit balance, it means Net income, otherwise it means Net loss.
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Example:
Given the following Trial Balance after adjusting entries (Adjusted trial balance), prepare the
necessary closing entries at fiscal-year ended September 30, 2010.
Debit Credit
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Closing entry
Closing entry
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Objective 2
Post-Closing Trial Balance
After posting the closing entries, one needs to prepare the Trial balance after closing entries or the
Post-Closing Trial Balance.
Debit Credit
Notice that in the Post-Closing Trial Balance, the income statement accounts and the drawing
account are not anymore included because they already have zero balances. In this trial balance,
the only remaining accounts are the real accounts or balance sheet accounts. Notice also that after
the closing entries, Kim Sam Soon, Capital increased from P 130,100 to P 231,020. This is due to
the addition of P 100,920, which is the amount in the last closing entry.
If the Post-Closing Trial Balance shows equal totals, then the books of accounts are ready for the
recording of transactions in the next accounting period.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 140 – 159, 166 – 167
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Confidentiality Requirement
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LESSON 16
REVERSING ENTRIES
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the concept of reversing entries and prepare
reversing entries
Objective 1
Reversing Entries
Reversing entries are optional entries that are prepared on the first day of the next accounting
period. The benefit of these entries is convenience in the recording of the journal entries which
are related to adjusting entries.
Pro-forma Entries
Accrued income
Accrued expense
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Confidentiality Requirement
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 156, 169 – 171
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Confidentiality Requirement
This material is prohibited for reproduction or distribution without prior consent from the author.
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