Business Transactions and

Their Analysis As Applied to

the Accounting Cycle of a
Service Business

FABM1

by: ZORINA LUGO

(Yuan Vani)
PROBLEMS INVOLVING
ADJUSTING ENTRIES
GIVE THE YEAR-END
ADJUSTING ENTRY
REQUIRED BY EACH OF THE
FOLLOWING:
1. The office supplies account
had a P2,850 balance on
January 1: supplies worth
P3,500 were bought during
the year; the year end
inventory showed P1,450 of
supplies unused.
January 1 P2850 + 3500= 6,350
Unused 1,450
Used of Supplies expense P4,900
ASSET METHOD
Journal entry for the supplies bought
Office Supplies 3,500
Cash 3,500

Adjusting Journal Entry

Office Supplies Used 4,900
Office Supplies 4,900
EXPENSE METHOD
Journal entry for the supplies bought
Supplies Expense 3,500
Cash 3,500

Adjusting Journal Entry

Supplies Expense 1,400
Office Supplies 1,400
(6,350-1,450=4,900 – 3,500=1,400)
2. Depreciation on delivery
equipment was estimated at
P5,500 per year.
Depreciation –delivery eqpt P5,500
Acc.Depr. –delivery eqpt 5,500
to record depreciation
3. Two months property taxes,
estimated at P1,500 have
accrued at the end of the
accounting period.
Tax Expense 1,500
Accrued Tax Expense 1,500
to record accrued tax
4. Three employees earn P450
each a day for a five-day a
week that begins on Monday
and ends on Friday. They were
paid weekly every Friday.
December 31 falls on a
Wednesday.
Salary Expense 4,050
Accrued Salary Expense 4,050
(450 x 3=1,350 x 3 =4,050)

Dec. 31 is Wednesday
Dec. 29 is Monday
From Dec 29-31 = 3 days
F. 1. On December 31, the end
of its accounting period, the
following information for
adjustment was available:
Prepaid Insurance
Jan.1 P10,500
July 1 36,000
Oct 1 24,000
The January 1 balance represents
the unexpired insurance premium
on a one-year insurance policy
purchased on September 1 of the
previous year. The July 1 balance
represents a two-year insurance
policy starting on that date and
the October 1 balance represents
a one year insurance policy.
January 1 P10,500 represents 8
month unexpired insurance
(10,500 / 8months = 1,312.50/mo)
Sept 1 to Aug 31= 12 months
(1,312.50 x 12 = 15,750
Sept 1 to Dec 31 = 4months
1,312.50 x 4 = 5,250
Therefore, 15,750 – 5,250=10,500
To record the expired insurance
Insurance expense P10,500
Prepaid insurance 10,500
July 1 P36,000 represents 24 month
prepaid insurance
(36,000 / 24 months = 1,500/mo)
Jul 1 to Dec 31= 6 months
1,500 x 6months = 9,000
Therefore, the AJE for Dec 31 is

Insurance expense P9,000

Prepaid Insurance 9,000
Oct 1 P24,000 represents 12 month
prepaid insurance
(24,000 / 12months = 2,000/mo)
Oct 1 to Dec 31= 3 months
2,000 x 3 months = 6,000
Therefore, the AJE for Dec 31 is

Insurance expense P6,000

Prepaid Insurance 6 ,000
Insurance expense P25,500
Prepaid Insurance 25,500
(10,500 + 9,000+ 6,000)
to record the expired insurance
2. The company rent a portion of
its building to two tenants.

Tenant A agreed beginning

October 1 to rent a small space at
P5,500 per month and at the same
date, he paid six months rent in
advance. The payment was
credited to Unearned Rent
Account.
Tenant B pays P11,000 per month
on the space he occupies. During
the months July to November, he
paid his monthly rental on the
first day of each month and the
amount paid was credited to Rent
Income account. However, in
December, tenant B was not able
to pay his monthly rental.
Tenant A agreed beginning
October 1 to rent a small space at
P5,500 per month and at the same
date, he paid six months rent in
advance. The payment was
credited to Unearned Rent
Account.
Oct 1 Journal Entry
Cash P33,000
Unearned Rent Income 33,000
Oct 1 Journal Entry
Cash P33,000
Unearned Rent Income 33,000

Dec 31 Adjusting Journal Entry

Unearned Rent Income 16,500
Rent Income 16,500
( 5,500 x 3 months Oct1-Dec1=16,500)
Journal Entry:

Cash 55,000
Rent Income 55,000
to record the receipt of
payment
(Jul to Nov = 5 months x 11,000)
Adjusting Journal Entry:

Accrued Rent Income 11,000

Rent Income 11,000
to record the uncollected
income
(Jul to Nov = 5 months x 11,000)
1. Depreciation on delivery
equipment was estimated at
P3,500.
1. Depreciation on delivery
equipment was estimated at
P3,500.
Depreciation –delivery eqpt P3,500
Acc.Depr. –delivery eqpt 3,500
to record depreciation
2. Three month s property
taxes, estimated at P1500
have accrued but unrecorded
at the end of the accounting
period
2. Three month s property
taxes, estimated at P1500
have accrued but unrecorded
at the end of the accounting
period
Tax Expense 1,500
Accrued Tax Expense 1,500
to record accrued tax
3. The balance of the repair
supplies account on Jan 1 is
P1,200; P3,500 of repair
supplies were purchased
during the year and a year end
inventory showed P1,100
supplies unused
Jan 1 is P1,200
Jan 1 P1,200
Journal Entry 3,500
4,700
Repair supplies P3,500
Cash 3,500
Dec. 31 Adjusting Journal EntryP1,100

Repair Supplies used 3,600

Repair Supplies 3,600
to record the used supplies
(4,700- 1,100 = 3,600)
4. Four employees earn a total
of P2,000 per day for a five
day week that begins on
Monday and ends on Friday.
They paid for the week ended
Friday December 28.
Salary Expense 2,000
Accrued Salary Expense 2,000
to record the accrued salary

Dec. 28 is Friday
Dec. 29 is Saturday
Dec 30 is Sunday
Dec 31 is Monday
5. The company owns and
occupies a building that was
completed and occupied for the
first time on April 1 of the
current year. The building cost
P200,000 has an estimated life of
40 years and is not expected to
have any salvage value at the end
of its life.
April 1 to Dec 31 = 9 months

(P200,000/40 = 5,000/12months =
416.67/month x 9 months = 3,750)

Adjusting Journal Entry:

Depreciation Bldg P 3,750
Accumulated Depr- Bldg 3,750
6. On November 1, a tenant
occupying a space of the building,
agreed to pay P5,500 per month
and on that date, he paid six
months rent in advance. The
amount paid was credited to
Unearned Rent Account.
6. On November 1, a tenant
occupying a space of the building,
agreed to pay P5,500 per month
and on that date, he paid six
months rent in advance. The
amount paid was credited to
Unearned Rent Account.
Nov. 1 Journal Entry
Cash P33,000
Unearned Rent Income 33,000

Dec 31 Adjusting Journal Entry

Unearned Rent Income 11,000
Rent Income 11,000
( 5,500 x 2 months Nov1-Dec1=11,000)
7. Accrued driver s wages at the
end of the year is P2,500
7.
Salaries and Wages 2,500
Accrued & salaries wages 2,500
8. One month s interest on the
mortgage P6,000 has accrued.
8. Interest Expense P6,000
Accrued Interest Expense 6,000
9. The business has an account
receivable of P10,500 and 10% is
uncollectible.
9. Bad Debts 1,050
Allowance for Bad Debts 1,050
to record the uncollectible
10. One month interest on a
P10,000 10% 60 day note was
collected.
10. Cash 166.67
Interest Receivable 166.67
(10,000 x 0.1 x 60/360 =166.67
FINANCIAL
STATEMENTS
The following are the financial statements
to be prepared:
1. Statement of Financial Position (SFP) -
Also known as the balance sheet. This
statement includes the amounts of the
company’s total assets, liabilities and
owner’s equity which in totality provides
the financial position of the company on a
specific date.
2. Statement of Comprehensive
Income (SCI) – Also known as the
income statement. Contains the
results of the company’s operations
for a specific period of time. This can
be prepared on a monthly, quarterly
or yearly basis.
3. Statement of Changes in Equity (SCE)
- This statement is prepared prior to
preparation of the Statement of Financial
Position in order to obtain the ending
balance of the equity to be used in the SFP.
All changes, whether increases or
decreases to the owner’s interest on the
company during the period, are reported
here.
4. Cash Flow Statement (CFS)
or Statement of Cash Flow
(SCF) - Provides an analysis of
inflows and/or outflows of cash
from/to operating, investing and
financing activities.
The income statement is prepared first so that
net income can then be recorded
in the statement of changes in equity. The
statement of changes in equity is then
prepared to determine the ending balance of
equity or capital account. Once the ending
balance is determined, the statement of
financial position is prepared. The cash flow
statement is prepared last.
STEP 8

CLOSING THE
BOOKS
After preparing the financial
statements, closing entries are
done at the end of the period
to bring all nominal or
temporary accounts back to
zero and prepare them for the
next accounting period.
1. All of the nominal revenue
accounts should be closed to
the income summary account
by a Debit to revenue and a
Credit to income summary.
Closing Entries:

1. Service Income ---- xxx

Income Summary ----xxx

.
2. All of the nominal
expense accounts should be
closed to the income summary
by a Credit to expense and a
Debit to income summary.
Closing Entries:

2. Income Summary ---- xxx

Expense Account ----xxx

.
The balance in the income
summary account should now
reflect the net income for the
accounting period.
3. The next journal entry should
close the income summary
account to the equity or capital
account. If there is a net profit this
entry will be a Debit to income
summary and a Credit to owner’s
capital account.
Closing Entries:

3. Income Summary --- xxx

Capital account- ----xxx

4.
4. Close the drawing account to
capital account by debiting the
capital account and credit to drawing
account.
Closing Entries:

4. Capital Account - xxx

Drawing Account - xxx

.
Once the closing journal entries have
been entered into the general
journal, the information should be
posted to the general ledger. When
this is accomplished, all of the
nominal accounts in the general
ledger should have zero balances.
To double check on this, we should
prepare another trial balance based
on the new balances in the general
ledger. (POST CLOSING TRIAL
BALANCE)
If we have any nominal accounts with
positive balances, a mistake was made
along the way and will need to be
corrected before proceeding to the next
accounting period..
POST CLOSING
TRIAL BALANCE
The post closing trial balance is
prepared from the general ledger
accounts after the closing entries
have been posted. This is necessary
to ensure that these entries have
been correctly posted. This will also
test the equality of the accounts.
The post closing trial balance
confirms the equality of the debits
and credits. It only contains only
balance sheet items such as assets,
liabilities and ending capital because
all the income and expense accounts
have zero balances as a result of
closing entries
Presented below is the adjusted trial balance of MNM Co.
MNM Delivery
Trial Balance
December 31, 2016
Cash Php375,000
Accounts Receivable 180,000
Supplies 10,000
Prepaid Insurance 22,500
Furniture and Fixtures 187,500
Accumulated Dep. Furn. & Fix Php 22,500
Accounts Payable 67,500
Notes Payable 82,500
MNM Capital 484,500
MNM Drawing 75,000
Delivery Income 315,750
Rent Expense 60,000
Salaries Expense 11,250
Utilities Expense 37,500
Advertising Expense 13,500 __________________
P897,750 P897,750
REVERSING
ENTRIES
Reversing Entries are made to
simplify the accounting process.
They are made on the first day of the
accounting period. Reversing entries
are optional and are not used in
connection with all adjusting entries.
Following are the adjusting entries
that can be reversed.
1. Prepayments (expense method)
2. Unearned Revenue (income
method)
3. Accrued Expenses
4. Accrued income
A reversing entry is simply a journal
entry that is just the opposite of the
adjusting entry made at the end of
the accounting period.
Example:

Adjusting entry

2016
May 31 Utilities Expense 4,500
Utilities Payable 4,500
Example:

Reversing Entry

2016
June 1 Utilities payable 4,500
Utilities expense 4,500
Example:

Payment Entry
2016
June 4 Utilities payable 4,500
Cash 4,500