DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CHAPTER I FUNDAMENTALS OF ACCOUNTING Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an organization to interested users.” (Weygandt,J.et.al) IMPORTANCE OF ACCOUNTING IN BUSINESS As we all know, there are so many people who depend their means of livelihood on employment in various business establishments. Thus, business is of central importance in our economic society. Business as an organization has some goals to attain. Its success depends to a great extent on the ability of management to render decisions in behalf if the business? But what is the basis of management in making decisions. Accounting provides management with information essential to the efficient conduct and evaluation of its activities. It gathers data which are of financial in character, identifies which data are relevant to the decisions to be made, processes and analyzes these data before transforming into reports that can be used in making better decisions. Therefore, decision-makers of the business are relying on accounting data to be able to make decisions. At this point, the accountant who is a knowledgeable expert professional in the field of accounting enters into the picture in the world of business. In general, the primary role of an accountant in business is to prepare financial statements. The accumulated accounting data that are stored in the books of accounts are transformed into report form called “financial statements”. To make this report more meaningful, significant and historic in the life of the business, he does the most sensitive aspect of accounting by analyzing and interpreting these financial data and provide the management with guide and a basis for formulating and adopting financial plans and policies that will lead to efficient management, thereby the goals and objectives for the business are attained. IDENTIFYING- this involves selecting economic events that are relevant to a particular business transaction. The economic events or transactions- In a bakery business: Sales of bread and other bakery products. Purchases of flour that will be used for baking Purchases of trucks needed to deliver the products. RECORDING- this involves keeping a chronological diary of events that are measured in pesos. The diaries referred to in the definition are the journals and ledgers. COMMUNICATING- occurs through the preparation and distribution of financial and other accounting reports. 1|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS IMPORTANCE OF KEEPING BUSINESS RECORDS The business should keep a “diary” of all transactions and events that it may have entered into. It is difficult to memorize or recall considering the volume of the day to day transactions that occurred. The records that are used and kept for this purpose are called books of accounts. While the data that are stored in the book of accounts which are of financial in character are called accounting data which will later be processed and transformed into a report form called financial statements. NATURE OF ACCOUNTING According to Accounting Theory: Accounting is a systematic recording of financial transactions and the presentation of the related information to appropriate persons.” Accounting is a service activity. Accounting provides assistance to decision makers by providing them financial reports that will guide them in coming up with sound decisions. Accounting is a process. A process refers to the method of performing any specific job step according to the objectives or targets. Accounting is identified as a process, as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some define steps like the collection, recording, classification, summarization, finalization, and reporting of financial data. Accounting is both an art and discipline. Accounting is the art of recording, classifying, summarizing and finalizing financial data. The word “art” refers to the way something is preformed. It is behavioral knowledge involving a certain creativity and skill to help us attain some specific objectives. Accounting is systematic method consisting of define techniques and its proper application requires skill and expertise. So by nature, accounting is an art. And because it follows certain standards and professional ethics, it is also discipline. Accounting deals with financial information and transactions: accounting records financial transactions and data, classifies these and finalizes their results given for a specified period of time, as needed by their users. At every stage, from start to finish, accounting deals with financial information and financial information only. It does not deal with non-monetary or non-financial aspects of such information. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has evolved to meet the need for financial information as required by various interested groups. 2|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS FUNCTION OF ACCOUNTING IN BUSINESS Accounting is the means by with business information is communicated to business owners and stakeholders. The role of accounting in business is to provide information for managers and owners to use in operating the business. In addition, accounting information allows business owners to assess the efficiency and effectiveness of their business operations. Prepared accounting reports can be compared with industry standards or to a leading competitor to determine how the business is doing. Business owners may also use historical financial accounting statements to create trends for analyzing and forecasting future sales. NATURE OF BUSINESS A business firm may be classified in terms of what they offer, sell or produce. They are as follows. SERVICE CONCERN- the business derived its income from services rendered to clients in the case of professional services like that of Accountants, Lawyers, Doctors, Dentist, etc. or to customers, in the case of non-professional services, like that of a laundry shop, car repair shop, janitorial servicing etc. MERCHANDISING – the business is engaged in buying goods or commodities or any form of finished products and sells these at a profit. It might be at a retail or wholesale basis. Grocery stores are typical examples of this nature of business. MANUFACTURING - the business is engaged in buying of raw materials and supplies to be processed or manufactured, converting them into finished products for sale at a profit, like that of a furniture shop, a manufacturer of cars ad a home appliances and the like. AGRICULTURE- The business is engaged in planting of crops and sells its products either in raw or finished form at a profit. LEGAL FORMS OF BUSINESS ORGANIZATION There are four (4) legal forms of business organization that a person may choose from in establishing a business. They are Sole or Single Proprietorship, Partnership, Corporation and Cooperatives. The Generally Accepted Accounting Principles will still apply the Financial Statement of all four forms of organization. Sole Proprietorship- This is the simplest form of business organization where capital is owned and provided by only one person called “Proprietor” who may manage the business by himself or hire another person to do so. 3|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Partnership- the capital of the business is owned or provided by the two or more person called “Partners” who should set forth agreements among themselves which include among others, the initial investments of each partner, how profit and loss is to be divided and settlement to be made upon death or withdrawal of a partner as embodied in the “ Articles of Co-Partnership” they have executed. Corporation- this is the biggest and most complicated form of business organization. This is organized by at least five but not more than fifteen person called “Incorporators”. Its capital is called “Capital Stock” which is divided into units called “shares” and each share has a designated value called “Par Value”. Owners of the shares of stock are called “stockholders”. Shares of stocks can be transferred without dissolving the corporation, so it enjoys unlimited life. COOPERATIVES - it operates similar to a corporation. It has its Board of Directors who are selected from among its members. However, while number of voting shares in a corporation is based on shareholdings, in a cooperative it is on a “ one-man, one vote” basis. Moreover , patronage refunds are given to cooperative members who patronized their business activities. HISTORY OF ACCOUNTING Accounting is as old civilization itself. It has evolved in response to various social and economic needs of men. Accounting started as a simple recording of repetitive exchanges. The history of accounting is often seen as indistinguishable from the history of finance and business. Following is the evolution of accounting: THE CRADLE OF CIVILIZATION Around 3600 BC record-keeping was already common from Mesopotamia, China and India to Central and South America. The oldest evidence of this practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the time such as listing of accounts receivable and accounts payable. 14TH CENTURY- DOUBLE-ENTRY BOOKKEEPING The most important event in accounting history is generally considered to be the dissemination of double entry bookkeeping by Luca Pacioli (Father of Accounting) in 14 th century Italy. Paciolii was much revered in his day, and was a friend and contemporary of Leonardo da Vinci. The Italians of the 14 th to 16th centuries are widely acknowledged as the fathers of modern accounting and were the first to commonly use Arabic numerals, rather than Roman, for tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a detailed chapter on double entry bookkeeping. 4|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS FRENCH REVOLUTION (1770s) The thorough study of accounting and development of accounting theory began during this period. Social upheavals affecting government, finances, laws, customs and business had greatly influenced the development of accounting. THE INDUSTRIAL REVOLUTION (1760-1830) Mass production and the great importance of fixed assets were given attention during this period. 19TH CENTURY- THE BEGINNINGS OF MODERN ACCOUNTING IN EUROPE AND AMERICA The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the Chartered Accountant (CA). In the late 1800s, chartered accountants from Scotland and Britain came to the U.S. to audit British investments. Some of these accountants stayed in the U.S., setting up accounting practices and becoming the origins of several U.S. accounting firms. The first national U.S. accounting society was set up in 1887. The American Association of Public Accountants was the forerunner to the current American Institute of Certified Public Accountants. (AICPA) In this period rapid changes in accounting practice and reports were made. Accounting standards to be observed by accounting professionals were promulgated. Notable practices such as mergers, acquisitions and growth of multinational corporations were developed. A merger is when one company takes over all the operations of another business entity resulting in the dissolution of another business. Businesses expanded by acquiring other companies. These types of transactions have challenged accounting professionals to develop new standards that will address accounting issues related to these business combinations. THE PRESENT- THE DEVELOPMENT OF MODERN ACCOUNTING STANDARDS AND COMMERCE The accounting profession in the 20th century developed around state requirements for financial statement audits. Beyond the industry’s self-regulation, the government also sets accounting standards, through laws and agencies such as the Securities and Exchange Commission (SEC). As economies worldwide continued to globalize, accounting regulatory bodies required accounting practitioners to observe International Accounting Standards. This is to assure transparency and reliability, and to obtain greater confidence on accounting information used by global investors. 5|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Question for Review: 1. 2. 3. 4. Define Accounting. Give examples of decisions or questions that can be supported by accounting information. Do you agree: “Accounting is vital to the success of a business?” Explain. Do you think that non-financial information is still useful in the accounting process? Why or why not? Explain. 5. Give a concrete example on how you can use accounting in your daily life. 6. Give some limitations of accounting. SUMMATIVE ASSESSMENT 1. Which of the following is NOT a step in the accounting process? a. Identification b. Communication c. Recording d. Verification 2. Which of the following is NOT a relevant economic event? a. An agent who attended to the concern of a complaining customer b. Patricia, manager of Company X, who sold an abandoned building of her company. c. Company Y which borrowed Php. 5M from a bank due to tight financial condition. d. Company Z which paid its employees their salaries for the month of January. 3. Which of the following does NOT show one of the main functions of accounting? a. Fred prepared a report to be submitted to the taxing authorities. b. John recorded the purchase of equipment in the accounting books immediately after purchase. c. Jason prepare financial reports monthly for the company stakeholders. d. Allen canvassed the price of sewing machine to be used in the company operations. 4. Which of the following statements describes the accounting process? a. It involves identifying relevant economic events. b. Recording economic events is an essential part of the accounting process. c. The accounting process is not complete if the financial information is not communicated to interested users. d. All of the above. 5. Which is the most important step in the accounting process? 6|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS a. Identification b. Recording c. Communication d. All steps are equally important. 6. Who is considered as the father of modern accounting? a. Queen Victoria b. Luca Pacioli c. Augustus d. Suetonius 7. Which of the following is mostly used by accountants in communicating the results of operations to outside parties? a. Performance memos b. Bulletin board postings c. Public announcements of the results of operations d. Financial statements 8. What profession does NOT use accounting information at all? a. Entrepreneurs b. Economists c. Government Officials d. None of the above 9. Who is the person responsible for the process of identifying, recording, and communicating economic events of an organization? a. Manager b. Accountant c. Bookkeeper d. Treasurer 10. Statement I- Small businesses, such as sari-sari stores, have little to no use of accounting. Statement II- Accounting reports and/ or financial statements need not be presented in a standardized way. a. Both statements are true. b. Only Statement I is true. c. Only Statement II is true. d. Both statements are false. 7|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CHAPTER II BUSINESS AND ACCOUNTING Accounting is divided into several branches to better serve the needs of different users with varying information needs. These branches sometimes overlap and they are often closely intertwined. FINANCIAL ACCOUNTING Financial accounting is the broadest branch and is focused on the needs of external users. Financial accounting is primarily concerned with the recognition, measurement and communication of economic activities. This information is communicated in a complete set of financial statements. It is assumed under this branch that the users have one common information need. Financial accounting conforms with accounting standards developed by standard-setting bodies. In the Philippines, there is a Council created to set these standards. Examples of these financial reports include: The balance sheet (statement of financial condition) Income statement ( the profit and loss statement, or P&L) Statement of cash flows Financial accounting is primarily concerned with processing historical data. Although financial accounting generally meets the needs of external users, internal users of accounting information also use this information for their decision-making needs. MANAGEMENT (Managerial) ACCOUNTING Management accounting emphasizes the preparation and analysis of accounting information within the organization. The objective of managerial accounting is to provide timely and relevant information for those internal users of accounting information, such as the managers and employees in their decisionmaking needs. Oftentimes, these are sensitive information and are not distributed to those outside the business for example, prices, plans to open up branches, customer list, etc. Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and similar areas. GOVERNMENT ACCOUNTING Government accounting is the process of recording, analyzing, classifying, summarizing, communicating and interpreting financial information about the government in aggregate and in detail reflecting transactions and other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. This branch of accounting deals with how the funds of the government are 8|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS recorded and reported. Government accounting deals with these transactions, the recording of inflow and outflow of funds of the government. AUDITING There are two types of auditing: external and internal auditing. External auditing refers to the examination of financial statements by an independent CPA (Certified Public Accountant) with the purpose of expressing an opinion as to fairness of presentation and compliance with the Generally Accepted Accounting Principles (GAAP). The audit does not cover 100% of the accounting records but the CPA reviews a selected sample of these records and issues an audit report. Internal Auditing deals with determining the operational efficiency of the company regarding the protection of the company’s asstes, accuracy and reliability of the accounting data, and adherence to certain management policies. It focuses on evaluating the adequacy of a company’s internal control structure by testing segregation of duties, policies and procedures, degrees of authorization, and other controls implemented by management. TAX ACCOUNTING Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It also involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax decisions and other tax-related matters. COST ACCOUNTING Sometimes considered as a subset of management accounting, cost accounting refers to the recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing business since they have the most complicated costing process. Cost accountants also analyze actual and standard costs to help managers determine future courses of action regarding the company’s operations. Cost accounting will help the owner set the selling price of his products. ACCOUNTING EDUCATION This branch of accounting deals with developing future accountants by creating relevant accounting curriculum. Accounting professional can become faculty members of educational institutions. Accounting educators contribute to the development of the profession through their effective teaching, publications of their research and influencing students to pursue careers in accounting. Accounting teachers share their knowledge on accounting so that students are informed of the importance of accounting and its use in our daily lives. 9|Page DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS ACCOUTING RESEARCH Accounting research focuses on the search for new knowledge on the effects of economic events on the process of summarizing, analyzing, verifying, and reporting standardized financial information, and on the effects of reported information on economic events. Researchers typically choose a subject area and a methodology on which to focus their efforts. The subject matter of accounting research may include information systems, auditing and assurance, corporate governance, financials, managerial and tax. Accounting research plays an essential part in creating new knowledge. Academic accounting research “ addresses all aspects of the accounting profession” using a specific method. Practicing accountants also conduct accounting research that focuses on solving problem for client or group of clients. The accounting research helps standard-setting bodies around the world to develop new standards that will address recent issues or trend in global business. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) The preparation of financial statements is governed and guided by Generally Accepted Accounting Principles (GAAP). Generally Accepted Accounting Principles are uniform set of accounting rules, procedures, practices and standards that are followed in preparing the financial statements. Before an accounting principle becomes generally accepted in the practice, it must first meet with the following requirements, to wit: a. It must have been established by a standard-setting body and must have gained world-wide or universal acceptance among practitioners: b. It must have substantial authoritative support from accounting bodies, such as Securities and Exchange Commission ( SEC), Financial Executive Institute of the Philippines (FINEX), Bangko Sentral ng Pilipinas (BSP), Board of Accountancy (BOA), Commission on Audit (COA) and other respectable members of the financial community both locally and internationally. 10 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Accounting Business Organization Sole prop rieto rship part ners hip operations corp orati on servi ce Merc hand Manu ising ring factu ACCOUNTING PRINCIPLES Some of the General Accepted Accounting Principles that are followed and are still applicable for use are: 1. Cost Principle- this principle requires that assets should be recorded at original or acquisition cost. 2. Objectivity Principle- This principle requires that accounting records should be based on reliable ad verifiable data as evidence of transactions. 3. Materiality Principles- This principle dictates practicability to rule over theory in determining the evaluation of an item. To determine whether the item is material or not, it is a matter of professional judgment on the part of the accountant. 4. Matching Principle- This is the combined concept of Revenue Recognition and Expenses Recognition Principles. Revenue should be recognized when earned and corresponding expense should be recognized when incurred during the same period as revenue is earned. Proper matching of revenue and expense are called for. 5. Consistency Principle- this principle requires that accounting methods and procedure should be applied on a uniform basis from period to period to achieve comparability in the financial statements. 6. Adequate Disclosure Principles - this principles requires that financial statements should be free from any material misstatement; that if there is any, proper disclosure should be made. 7. Business entity principle- A business enterprise is separate and distinct from its owner or investor. 11 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS MOTIVE OF PERSONS ENGAGED IN BUSINESS The primary motive of persons engaged in business is profit. When we put in or invest capital into the business which may either be in terms of money, property or both, we expect to receive in return an amount more than they invested. But risk is inherent in every business activity, so that the results of its operations may not always turn out to be as expected. Business sometimes suffers setbacks and thereby incurs losses. However, a business may stand at a point much better than incurring losses. That if the business cannot make profits, it cannot also incur losses. This is an instance wherein total sales or income earned and total costs and expenses incurred at the end of a given period are equal. This “No profits, no loss” situation of the business is being referred to as “break-even” Illustrated below are three (3) possible results of the business operations: At profit At Loss At Break-even Income Earned 100,000 100,000 100,000 Less: Cost & Exp. 80,000 120,000 100,000 Profit (loss) 20,000 (20,000) -0- Sales or BASIC ACCOUNTING ASSUMPTIONS 1. Accounting Entity- This assumes that from accounting point of view, the business is considered as “an entity that is separate and distinct from the owner or management”. When the owner puts in money, property or both into the business, these become “not his personal assets anymore but rather the assets of the business already”. 2. Going- Concern Assumption- the business is assured to have a continuous life of existence. Thus, it will continue to operate for an indefinite period of time, so that financial statements are prepared in a going concern unless there is a specific evidence to the contrary where departure from and abandonment of this assumption warrants. 3. Time-Period Assumption- this assumes that the business has a continuous life of existence. It is very impractical to wait for several years before its financial position, performance or result of operations and cash flows can be known. Due to the duration of its existence, the life of the business is divided into equal periods wherein at the end of each period the accountant prepares the financial statements. The period being referred to is known as “accounting periods”. The owner or management has three (3) annual accounting periods to choose from as far as periodic reporting of financial statements are concerned, these are: 12 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Calendar Year- The accounting period will begin on January 1 and will end on December 31 of the same year. This is the most common annual accounting that the business adopts because this is the nearest accounting period wherein business adopts because this is the nearest accounting period wherein business entities file their Income Tax Returns. There are four (4) quarters in a calendar year and each quarter consisting of three (3) months. The first quarter covers from January 1 to March 31; the second quarter covers from April 1 to June 30; the third quarter covers from July 1 to September 30; and the fourth quarter and the last quarter covers from October 1 to December 31. Fiscal Year – accounting period will begin on the first day of any month of the year except January and will end on the last day of the twelfth month completing the one year period. The period begins on July 1 20A, it will end on June 30,20B. If quarterly basis is used in reporting of financial statements, the first quarter covers July 1 to September 30; the second quarter covers October 1 to December 31; the third quarter covers January 1 to March 31; and the fourth and the last quarter covers April 1 to June 30. Natural Business Year – is a twelve month period that ends on any month when the business is at the lowest or experiencing slack season. An enterprise may adopt any of the preceding accounting periods. The basic consideration in the choice of an accounting period is that the accounting period chosen must be reflective of result of “normal operations”. Unit of Measure- this assumes that in the Philippines we used the “peso” as a unit of measure. Peso as a unit of measure is assumed further to have a “stable value” which means that purchasing power of the peso is “constant” regardless of inflation rates or fluctuation in money values. In this, the function of accounting is “to account for peso only and not for changes in its purchasing power”. Accrual Basis- this assumes that the recording of income and expense follow the accrual basis of accounting. Under accrual basis, income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid. In other words, the essence of accrual basis of accounting is the recognition of accounts receivable, accounts payable, prepaid expenses, accrued expenses, deferred income and accrued income. This practice results to proper matching of revenue and cost and expenses and could therefore show a correct and meaningful financial statements. ELEMENTS OF FINANCIAL STATEMENTS There are five (5) elements of financial statements which are follows: 1. Assets 2. Liabilities 3. Owner’s Equity or Capital 13 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 4. Revenue or Income 5. Expenses ASSETS- are defined as “resources controlled by the enterprise as a result of past transactions and events and from which future economic benefits are expected to flow the enterprise. In layman’s language, assets denote things of value that are owned and used by the enterprise in its operations. Examples are cash, building, land, machinery, furniture and fixtures, equipment, tools, etc. it also includes inventories, prepaid expenses and a debt collectible by the enterprise from a customer from a customer which we termed as a “Receivable”. The following are the essential characteristics of an asset: 1. 2. 3. 4. The asset is controlled by the enterprise; The asset is a result of a past transaction or event; The asset provides future economic benefit; The cost of the asset can be reliably measured. LIABILITIES – are defined as “ present obligations of an enterprise arising from past transactions or events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits”. In layman’s language, liabilities denote financial obligations of the business to its creditors. It represents the claim of the creditors over the assets of the enterprise. The following are the essential characteristics of a liability: 1. The liability is the present obligation of a particular enterprise. This means that the enterprise’ liability must be identified; 2. the liability arises from past transactions or events. This means that the liability is not recognized until it is incurred; 3. the settlement of the liability requires an outflow of resources embodying economic benefits. This means that the obligation of the enterprise is to transfer cash and non-cash resources or provide services at some future time. OWNER’S EQUITY OR CAPITAL – is the residual interest in the assets of the enterprise after deducting all its liabilities. It is expressed in the equation as assets less liabilities equals owner’s Equity or Capital. It is increased when there is Profit or additional contributions by the owner and decreased when there is loss or withdrawal by the owner. In layman’s language, owners equity or Capital is the amount of money or value of property put by the proprietor into the business to start with the operations which is referred to as “ Initial Investment” or “ initial capital” Capital is synonymous to “ Proprietorship”’ “”Proprietary Interest” or Net worth.” The terms used in reporting the equity of an enterprise depending on what form of enterprise so as: 14 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 1. Owner’s Equity for a proprietorship 2. Partner’s Equity for a partnership 3. Stockholders’ Equity or Shareholders’ Equity for a corporation. Drawing or Personal- Refers to the amount of cash or value of the property that the owner has invested in the enterprise but later withdrawn for personal use. Revenues and Expenses which are the temporary accounts of Owner’s Equity are the components of an Income Statement, a financial statement which directly relates to the measurement of performance (previously termed as a result of operation) of an enterprise at the end of a given period of time. REVENUE AND GAINS - it defines revenue as the “gross inflow of economic benefits during the period arising in the course of ordinary activities of an enterprise when those inflows result in increase in equity, other than those relating to contributions from owners”. Examples are proceeds from services rendered by a servicing firm, income from use by other entities of the resources of the enterprise like royalties income, rent income, interest income etc. and sale merchandise by a trading firm, while gains include income from activities and events that do not form part of the ordinary course of the business operation. Example is gain on sale of property and equipment, etc. EXPENSES AND LOSSES- are the “gross outflow of economic benefits during the period arising in the course of ordinary activities of an enterprise when those outflow result in decrease in equity, other than those relating to distribution to owners”. Examples are salaries expense, rent expense, stationery and supplies expense, bad debts, depreciation, taxes and licenses, etc,. while losses represent decreases in assets or increases in liabilities arising from that activities or events that are outside the ordinary course of business operation. Examples are the loss from sale of property and equipment loss due to theft or pilferage et. PROFIT (LOSS) – the excess of revenues over expenses is called “profit”, if an expense exceeds the revenue a “Loss” FINANCIAL STATEMENTS Financial Statements are the means by which the information accumulated and processed in financial accounting are periodically communicated to the users. They are designed to serve the needs of variety of users, particularly owner and creditors. We will see then the “why” of accounting and this will facilitate our learning on the “how” or the mechanics of the financial statements preparation. 1. Balance Sheet- is a financial statement which shows the financial position of an enterprise as of a particular date. It consists of three (3) sections which are the Assets, Liabilities and Owner’s Equity section. A balance sheet is always dated as follows; “As of specific date” 15 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS The balance sheet measures and evaluates in term of the enterprise liquidity, solvency, financial structure and capacity for adaptation. Liquidity is the ability of the enterprise to meet currectly maturing obligations. Solvency is the availability of cash over the longer term to meet maturing obligations. Financial Structure is the source of financing for the assets of the enterprise. It indicates how much is borrowed capital and how much is equity capital. Capacity for Adaptation is the financial flexibility of the enterprise to use the available cash for unexpected requirements and investment opportunities Davao Laundry Services Balance Sheet As of 31, March 20A ASSETS Current Assets Cash in Bank Accounts Receivable Less: Allow. For Bad Debts Laundry Supplies Total Current Assets P 743,000 P 35,000 350 Non-Current Assets: Property and Equipment: Laundry Equipment: Less: Accumulated Depreciation Total Non-Current Assets Total Assets 34,650 70,000 P 847,650 P 150,000 2,500 147,500 P 995,150 LIABILITY AND OWNERS EQUITY LIABILITIES Current Liabilities Notes Payable Accounts Payable Accrued Advertising Total Current Liabilities P 100,000 30,000 3,000 133,000 OWNER’S EQUITY S. Santos, Capital Total Liabilities and owner’s Equity P 862,150 P 995,150 16 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS In the above balance sheet, the business tells us further that of the P 995,150, assets it owns, P 133,000 represents the claim of the creditors while the balance of P 862,150 represents the claim of the owner over the assets of the business. More importantly, the balance sheet presents the equation, ASSETS = LIABILITES + OWNER’S EQUITY P 995,150 = P 133,000 + 862,150 2. INCOME STATEMENT- is a financial statement which shows the performance of the enterprise for a given period of time. The performance of the enterprise is primarily measured in terms of the level of income earned by the enterprise through effective and efficient utilization of its resources. This income performance used to be known as the “results of operations” of the enterprise consists of revenues, expenses and operating results which would either be profit or loss. The relationship among the three can be expressed in the following: REVENUE PXX EXPENSES XX = PROFIT (LOSS) PXX Davao Laundry Services Income Statement For the month ended 31 March 20A Revenue Laundry income Operating Expenses Bad Debts Depreciation Exp. Salaries Exp. Rent Exp. Utilities Exp. Laundry Supplies Exp. Taxes & Licenses Advertising Exp. Operating Income Less: Finance Charges Interest Exp. Profit for the month P 80,000 P 350 2,500 10,000 5,000 12,000 20,000 4,000 3,000 56,000 23,150 1,000 22,150 The business makes profit if total income earned exceeds total expenses incurred. If total expenses incurred exceeds total income earned, the business incurs a loss. The business is said to be at break even 17 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS if total income earned is equal to total expenses incurred. In the above income statement, it shows that the business is making “profit” of P 22,150. 3. Statement of Changes in Equity – is a financial statement that summarizes the changes in equity for a given period of time. The beginning equity of the owner is increased by the additional investment and profit. Correspondingly, it is decreased by withdrawal and loss. Shown below is the Statement of Changes in Owner’s Equity of Davao Laundry Services for the month ended March 31,20A. Davao Laundry Services Statement of Changes in Owner’s Equity For the month ended 31 March 20A S. Santos, Owner’s Equity – March 1,20A Add: Additional Investment P -0Profit for the month 22,150 Total: Less: Withdrawal S. Santos, Owner’s Equity –March 31,20A P850,000 22,150 872,150 10,000 _______ P 862,150 Looking at his Statement of Changes in Equity, we say that the beginning equity of the owner, Mr. S. Santos in the amount of P850,000 has increased to P862,150 as a result of its operations. The amount of increase is calculated as follows: Owner’s Equity at the end P 862,150 Less: Owner’s Equity at the beginning 850,000 Increase in Owner’s Equity 12,150 The increase in owner’s equity by P12,150 is accounted for as follows: Profit for the month (Increase Owner’s Equity) Less: Owner’s withdrawal (Decrease Owner’s Eq) Net Increase in Owner’s Equity P22,150 10,000 P12,150 In an event wherein an owner’s withdrawal exceeds the profit of the business, there is a Net Decrease in Owner’s Equity, hence, beginning owner’s Equity will also be decreased). 18 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 4. Statement of Cash Flows- is a financial statement that provides information about cash inflows (Receipts) and cash outflows (Payments) of an entity for a given period of time which are being classified into the following activities: a. Operating Activities- the inflows and outflows of cash from the normal operating activities of the business. b. Investing activities- the inflows and outflows of cash from the sale or purchase of assets other than inventory. c. Financial activities- the inflows and outflows of cash from the owners and creditors of the enterprise. This shows the net increase or decrease in cash during the period and the cash balance at the end of the period. As shown in the statement below, cash increased by P743,000. Increased is accounted for as follows: Net cash flows provided by operating activities Decreased cash Cash flows from investing transactions Decreased Cash Cash flow from financing transactions Increased cash Net increase in cash (P47,000) (150,000) 940,000 P743,000 Show below is the Statement of Cash Flows of Davao Laundry Services for the month ended March 31,20A prepared under Direct Method. Davao Laundry Services Statement of Cash Flows For the month ended 31 March 20A Cash Flows from Operating Activities Cash received from customers Payment of taxes and licenses Payment of laundry supplies Payment of Salaries Payment of rental expense Payment of utilities Payment of interest Net cash provided by ( used in) Operating activities 19 | P a g e ( ( ( ( ( ( ( 45,000 4,000 60,000 10,000 5,000 12,000 1,000 ) ) ) ) ) ) ) (P47,000) DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Cash Flows from Investing Activities: Purchases of laundry equipment Net cash provided by (used in) Investing activities Cash Flows from Financing Activities: Cash received as investment by owner Cash received from borrowing Payment for withdrawal by owner Net cash provided by (used in) Financing activities Net Increase (Decrease) in Cash Cash balance at the beginning of the period Cash Balance at the end of the period (150,000) (150,000) 850,000 100,000 (10,0000 ) 940,000 P 743,000 ___-_____ P 743,000 5. Accounting Policies and Notes to Financial Statements- this is an integral part of the financial statements. This presents significant accounting policies that affected the financial statements and included supporting schedules of computations and disclosures of some events and other information essential to understanding the company’s accounts. 20 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL SELF ASSESSTMENT: True or False Instruction: Write letter “T” if the statement in correct and “F” if the statement is wrong. _______1. Accounting provides management with information which are of financial in character and identifies which data is relevant for decision – making. _______2. The primary role of an accountant in business is to prepare financial statements. _______3. Decision-makers of the business are relying of financial accounting data to be able to make decisions. _______4. The “no profit, no class “ situation of the business is referred to as “break-even” _______5. The primary motive of a person of a person engaged in business is profit. _______6. The accountancy profession is continually evolving and developing to meet the changing needs of time. ______7. The length of accounting period chosen depends on the need of the owner for financial information about his business. ______8. The period of one month is considered the shortest among the accounting periods. ______9. The excess of revenue over expenses is called operating loss. ______10. It becomes compulsory to all business establishments to maintain and keep business records as required by law. 21 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL DETERMINATION OF UNKNOWN ACCOUNTING ELEMENTS The following relates to the financial position of an enterprise: CASE 1 CASE 2 CASE 3 CASE 4 Assets P175,000 P450,000 P? P380,000 Liabilities ________ 100,000 120,000 Owner’s Equity P75,000 P______ P180,000 = _______ P- 0 - BASIC ACCOUNTING EQUATION ASSETS = LIABILITIES + CAPITAL CASE 1 P350,000 = P195,000 + P __________ CASE 2 _______ = 250,000 + 350,000 CASE 3 680,000 = ________ + 450,000 CASE 4 _______ = 650,000 + 320,000 CASE 5 275,000 = 85,000 + ____________ CASE 6 95,000 = ________ + 95,000 22 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Determination of Profit and Loss The following relates to the operating returns (performance) of the business.: Total Income Total Expenses Profit (loss) CASE 1 CASE2 CASE3 CASE4 CASE5 P85,000 60,000 P______ P90,000 ______ P60,000 P______ 40,000 (P10,000) P60,000 ______ P10,000 P75,000 ______ P -0- Determination of Profit, Loss and Breakeven Profit (loss) Income - Expenses = Breakeven CASE 1 P350,000 - P260,000 = _________ CASE2 P450,000 - _______ = P270,000 CASE3 P150,000 - _______ = -0- CASE4 P270,000 - _______ = (P20,000) CASE 5 P150,000 - _______ = P30,000 CASE 6 _______ - P30,000 = (P20,000) CASE 7 _______ - P50,000 = P10,000 CASE 8 _______ - P60,000 = -0- CASE 9 _______ - P70,000 = P20,000 CASE 10 _______ - P90,000 = (P10,000) 23 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL SUMMATIVE ASSESSMENT PETNESS FIRST PETSHOP Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank account for his business and deposited PHP500,000. The business earned PHP50,000 but he had doubts with the recorded expense of PHP60,000. He is not sure if he should include the following items as expenses: Salary expense Rent Expense 20,000 10,000 Utilities Expense (at home) 15,000 Utilities Expense (at the store) 10,000 Insurance expense 5,000 Withdrawals 10,000 TOTAL 60,000 Question What do you think should not be included as expenses? Why? 24 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL DISCUSSION QUESTIONS: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Explain the difference between assets and expenses? Explain the difference between notes receivable and notes payable? What are current and noncurrent liabilities? What are items that increase / decrease equity? Give examples of revenue. In a corporation, what are the items included under the equity account? Explain the difference between asset and expenses? Explain the difference between notes receivable and notes payable? Explain the difference between liabilities and revenues? How is net income/ (net loss) determined? 25 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CHAPTER 3 RULES OF DEBIT AND CREDIT IN ACCOUNTING Bookkeeping is the process of recording “systematically” the business transactions in a “chronological manner”. It is systematic because “it follows procedures and principles”. It is chronological because the transactions are recorded in “order of the date of occurrence.” The recording aspect is just one of the four major functions of Accounting. BUSINESS TRANSACTIONS AND EVENTS Not all business activities are “accountable”. Business activities are said to be accountable and are called business transactions and events when thet effect the assets, liabilities and owner’s equity or what we previously termed as accounting elements or accounting values which are classified into two (2) categories namely, 1. External transactions - these involve exchanges of economic resources by a business enterprise with another business enterprise. 2. Internal transactions – these are transaction or events that happened or take place within the business enterprise only. Business events are the occasional occurrence in the life of business like for example, inventory loss due to theft and robbery, decline in market valuation of inventory, calamities affecting the enterprise, etc. Business transactions on the other hand, are exchanges of equal monetary values. This definition implies the following concept of understanding: 1. For every value received, another value is given away as an exchange; 2. These values are measured in terms of pesos which are presumed to be equal. To summarize, in every transaction, there is a Value Received, we call a Debit and Value Parted With, we call a Credit. This is the “give and take” process of accounting as expressed in an equation: Debit, Value Received = Credit, Value Parted With ANALYSIS OF BUSINESS TRANSACTIONS Business transactions are analyzed from the view point of the business. If the transaction is “Purchased” or “Bought” it is the business that is buying; if the transaction is “sold”, it is the business that is selling; if the transaction is “paid”, it is collecting; if the transaction is “collected”, it is the business that is collecting; if the transaction is “Rendered Services”, it is the business that is rendering services, etc. and 26 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS not the other way around. Don’t forget this, “always consider yourself as the business”, when making the analysis. The value received or debit should first be determined before the value parted with or credit. To test your analytical ability on transaction analysis let us have a series of dry run or drill. Let us try this , “If I’ll give you a spoon and you will give me a fork in return as an exchange, can you determine the value received and the value parted with? If your answer is, the value received is spoon and the value parted with is fork, you have answered it correctly. You will then say, “Debit, Spoon and Credit, fork” Let’s try it again, giving a final drill before we go into the business transaction analysis proper: “If I’ll give you a piece of paper and you will give me a pen in return as an exchange, can you determine the value received and the value parted with? If your answer is, the value received is a piece of paper and the value parted with is a pen, you have answered it correctly again. You will then say again, “Debit, a piece of paper and Credit, pen” Let us have this illustration: “Bought a car for cash, P650,00.” The following questions are answered for your final guide. 1. Who bought the car? Ans. The business identifying 2. What is the value received? Ans. Car 3. What is the value parted with? Analyzing Ans. Cash 4. What is the peso equivalent of these exchanges? Ans. P650,000 Measuring 27 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS We then say, Debit, value received – car P650,000 Credit, value parted with – cash P650,000 Journalizing ACCOUNT TITLES Account titles are identifications or brief descriptions of items that fall to same kind, class or nature. In recording business transactions, the elements of financial statements which are better known as accounting elements” or “accounting values” are to be assigned with their individual names called “account titles”. In other words, it is a part of our study in accounting where we are to give or assign names to various accounts. Here are the different account titles which we have classified into Balance Sheet (financial position) and Income Statement accounts (performance) BALANCE SHEET ACCOUNTS (Permanent Accounts) ASSETS Per PAS No. 1, assets are classified only into two, namely: Current Assets and non-current assets. CURRENT ASSETS- Refer to all assets that are expected to be realized, sold or consumed within the enterprise’s normal operating cycle. Operating cycle is the interval of the from the date of acquisition of merchandise inventory, sell the inventory to customers and the ultimate collection of cash from the sale. Cash – the account title to describe money, either in paper or in coins and money substitutes like check, postal money orders, bank drafts and treasury warrants. When cash is within the premise of the business, the account title is “Cash on Hand” and “Cash in Bank” if deposited in the bank. Petty Cash Fund- The account title for money placed and set aside for petty or small expenses. This exists when business used the imprested system of keeping cash. Cash Equivalents- defined as short-term, highly liquid instruments that are readily convertible into cash and they present insignificant risk of changes values because of changes in interest rates. 28 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Notes Receivable- This is promissory note that is received by the business from the customer arising from rendering of services, sale of merchandise, etc. Accounts Receivable- The account title for amounts collectible arising services rendered to a customer or client on credit or sale of goods to customers on accounts. This constitutes an oral or verbal promise to pay by a customer or client. Allowance for Bad debts- This is an “asset offset” or a “contra-asset” account. It provides for possible losses from uncollected accounts. Although this is not actually an asset, it is classified as such because it is shown as a deduction from the Accounts Receivable which is a Current Asset Account. Accrued Interest Income- the amount of interest earned on a Notes Receivable which is not yet collected. (if the note is interest-bearing). Advances to Employees - the amount title for amounts collectible from employees for allowing them to make cash advances which are deductible against their salaries or wages. Inventories- these are assets which are (1) held for sale in the ordinary course of business; (2) in the process of production for such sale; or (3) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Prepaid Expenses- account title for expenses that are paid in advance but are not yet incurred or have not yet expired such as Prepaid Rental, Prepaid Insurance, Prepaid Interest, Prepaid Advertising, etc. Unused Supplies – An account title for cost of stationery and other supplies purchased for use but are left on hand and still unused. The account title should be specified as to “Unused Office Supplies” if intended for the office, “Unused Shop Supplies” if intended for the shop, etc. These accounts are normally arranged according to “liquidity” (ready conversion to cash) in the Balance Sheet. NON-CURRENT ASSETS- The FRSC states that “all other assets not classified as current should be classified as non-current assets”. Property and Equipment- defined as “tangible assets which are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes, and are expected to be used during more than one period”, such as: a. Land – an account title for the site where the building used as office or store is constructed. 29 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS b. Building- Account title for a finished construction owned by the business where operations and transactions took place. c. Equipment- includes calculators, typewriters, adding machines, computers, steel filing cabinets and the like. If these are used in the office, the account title is “Office Equipment” and if used in the store, “Store Equipment”. Trucks, jeeps, vans, automobiles and other kinds of motor vehicles are used exclusively for delivering goods; the account title is “Delivery Equipment”. d. Furniture and Fixtures - includes chairs, tables, counters, display cases and the like. If these are used in the office, the account title is “Office Furniture & Fixtures” and if these are used in store, the account title is “Store Furniture & Fixture”. e. Accumulated Depreciation- this is an “asset offset” or “contra-asset” account. This is called a “ Valuation Account” which is shown as deduction from property and equipment. f. Intangible Assets- These are identifiable non-monetary assets without physical substance. Examples are patents, copyrights, franchises, trademarks, goodwill and others. The assets that are classified as Property & Equipment or Fixed Assets are called “Depreciable Assets” and are subject to “Depreciation” except land. Land is not subject to depreciation because it is expected to be useful to the business enterprise for an indefinite period of time. LIABILITIES Liabilities are classified only into two, namely: current liabilities and non-current liabilities. Current Liabilities- are financial obligations of the enterprise which are (a) expected to be settled in the normal course of the operating cycle; (b) due to be settled within one year from the balance sheet date. Account Payable- an account title for a financial obligation of an enterprise that constitutes an oral or verbal promise to pay. Notes Payable (Short-term) – as Accounts Payable in nature but only the obligation is evidenced by a promissory note. The enterprise is the one who issued the note. Accrued Expenses- these are expenses incurred by the enterprise but are not yet paid. This normally occurs when the accounting period ended such as rent, salaries, interest, taxes payable etc. 30 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS SSS Premium Payable – refers to the amount due and payable by the enterprise to the Social Security System. This is composed of both employer and employees share of SSS contributions. Philhealth Premium Payable – refers to the amount due and payable by the enterprise to the Philippine Health Insurance Corporation. This is composed of both employer and employees’ share of Philhealth contributions. Pag-ibig Premium Payable - refers to the amount due and payable by the enterprise to the Home Development Mutual Fund. This is composed of both employer and employees share of Philhealth contributions. Withholding Tax Payable- refers to the amount due and payable by the enterprise to the Bureau of Internal Revenue for the tax withheld from employees. Pre-collected or unearned Income- this is an account title for an income collected or received in advance and is not yet considered as “earned”. NON-CURRENT LIABILITIES – are financial long term obligations of the enterprise which are due and payable for more than one year. This usually occurs in a corporate form of business organization. Notes Payable (Long Term) - same nature with that of Notes Payable (short-term) but only, this requires payment for more than a year. Mortgage Payable – a financial obligation of the enterprise which requires a fixed or tangible property to be pledged as a collateral to ensure payment. OWNER’S EQUITY Capital- This is the center of the owner’s concern because this may increase or decrease at anytime as a result of business operation. In the normal course of operation, Owner’s Equity will be increased by “ income” and decrease by “expense” The owner’s capital investment is indicated by the use of the owner’s name with a word “ capital” written after the name which is separated by a “comma”. Thus, if the owner is Robert Jaworski, The title for his capital account is, “Robert Jaworski, Capital” 31 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Withdrawal- The owner’s withdrawal is likewise indicated by the use of the owner’s name with the word “Drawing” or “Personal” written after the name which is separated by a “comma”. Thus, if the owner is Robert Jaworski who made withdrawal, the title for his drawing account is, “ Robert Jaworski, Personal” or “Robert Jaworski Drawing” Income & Expense Summary- This is a temporary account created at the end of the accounting period where Income and Expenses are temporarily closed to this account. INCOME STATEMENT ACCOUNTS (Temporary Accounts) INCOME or REVENUE Sales- In general, this represents revenue derived from the sale of merchandise. Service Income- In general, this is the account title used for all types of income earned from the practice of their profession or may be specified as “Accounting or Auditing Fees Income” for Accountd, “legal Fees Income” for lawyers, “Dental Fees Income” for Dentist, “Medical Fees Income” for Doctors, etc. Professional Income- the account title generally used by professionals for income earned from the practice of their profession or may be specified as “Accounting or Auditing Fees Income” for Accountants, “Legal Fees Income” for Lawyers, “Dental Fees Income” for Dentists, “Medical Fees Income” for Doctors etc. Rental Income- for income earned on buildings, space or other properties owned and rented out by the business as the main line of its activity. Interest Income - for income received by the business arising from an amount of money borrowed by a customer and is usually covered by a promissory note. This is typical in a lending institution. Miscellaneous Income- for income earned by the business which is not the main line of its activity and could not be clearly classified. 32 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS EXPENSES Cost of Sales or Cost of Goods Sold – cost to produce and sell the goods. Interest Expense- an expense incurred from borrowed money. This is separately shown as a deduction from Operating Income before arriving as Net Income. Rent Expense- for the amount paid or incurred for use of property, usually premises. Repairs and Maintenance- for experience incurred in repairing or servicing the building, machineries, vehicles, equipment, etc, which are owned by the business. Stationery and Office Supplies Expense- The stationery, envelopes, clips, fasteners, etc. used in the office will bear the account title as “Office Supplies”;if use in the store ”Store Supplies” or another title may be used to describe the kind of supplies used. Salaries Expense – For compensation given to employees of a business. It may be specified as “Office Salaries”, “Salesmen’s Salaries”, etc. Bad Debts- for the anticipated loss that the business may occur arising from uncollectable accounts. Depreciation Expense- for the allocated portion of the cost of property and equipment or fixed assets. Taxes and Licenses- for the amount paid for business permits, licenses and other government dues except the Income Tax paid which is not allowable by law as a deduction. Insurance Expense- account title for the expired portion of the insurance premium paid. Utilities Expense- account title for telephone, light and water bills. Also included is gasoline, lubricants and oil. SSS Contribution- Account title for the employer’s share on SSS Contribution. Philhealth Contribution- account title used for the employer’s share on Philhealth Contribution. Pag-ibig Contribution- The account title used for the employer’s share on Pag-ibig contribution. Miscellaneous expense- any amount paid as expense with is not significant enough to warrant a particular classification. 33 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Instruction: For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease (D) or is not affected (NE). A L E ______ ________ ________ ______ ________ ________ 3. The company receives cash from a bank loan. ______ ________ ________ 4. The company repays the bank that had lent money. ______ ________ ________ 5. The company purchases equipment with its cash. ______ ________ ________ 6. The owner contributes her personal truck to the business. _____ ________ ________ 7. The company purchases supplies on credit. ______ ________ ________ _____ ________ _______ 9. The owner withdraws cash for personal use. ______ ________ _______ 10. The company repays the suppliers. ______ ________ _______ 1. The owner invest personal cash in the business 2. The owner withdraws business assets fro personal Use. 8. The company purchases land by paying Half in cash and signing a note. 34 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Instruction: The activity below is in reverse. Instead of analyzing transaction, describe each given entry into a business daily transaction. Example: 1. The owner invested cash of PHP 150,000 or the business earned PHP 150,000 cash from providing services. Date Assets Cash Supplies Equipment Bal 60,000 7,500 300,000 1 150,000 2 (20,000) 3 (112,500) 4 (15,000) 6 (53,000) 7 75,000 292,500 20,000 (112,500) 5,000 (15,000) (53,000) (8,000) 35 | P a g e Owner’s Equity 150,000 5,000 5 Liabilities (8,000) DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL CLASSIFYING ACCOUNTING VALUES Instruction: Classify the following account titles as to Assets, Liabilities and Owner’s Equity. Use “Check Mark. ASSET Sample (a) Rent Expense 1. Cash in Bank 2. Felinda Dabalos, Capital 3. Postage and Communication 4. Accounts Receivable 5. Accounts Payable 6. Taxes and Licenses 7. Unused Office Supplies 8. Advances to Employees 9. Commission Income 10. Petty Cash Fund 11. Insurance Expense 12. Cash on Hand 13. Interest Income 14. Interest Expense 15. Retainer Income 36 | P a g e LIABILITY OWNER’S EQUITY / DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL IDENTIFYING A CURRENT AND FIXED ASSETS Instruction: Classify the following asset accounts. On the space provided, write CA, if Current Assets and PE, if Property and Equipment. 1. Land ________ 2. Accounts Receivable ________ 3. Notes Receivable ________ 4. Building ________ 5. Unexpired Insurance ________ 6. Cash on Hand ________ 7. Furniture and Fixtures ________ 8. Advances to Employees ________ 9. Unused Office Supplies ________ 10. Store Equipment ________ 11. Prepaid Rent ________ 12. Office Equipment ________ 37 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Determination of Value Received and Parted With Instruction: Determine the Value Received or Debit and the Value Parted With or Credit and indicate the account classification as to Asset, Liability, Owner’s Equity, Income and Expenses. The transaction of Sept. 1 is answered for your guide. Value Received or Debit Cash ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Date Sept. 1 3 5 8 10 12 14 16 17 20 22 29 30 Account Classification = Asset _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Value Parted with or Credit Rallos, Capital ___________ ___________ ___________ ___________ ___________ ___________ __________ ___________ ___________ ___________ ___________ ___________ Account Classification Owner’s Equity ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ The following were the transactions of Miss Evansuenda Rallos during the month of September 20A. Sept 1 3 5 8 10 12 14 16 17 20 22 29 30 38 | P a g e Made cash investment to the business Rendered Service on account Borrowed money from a bank with a note issued Received cash from services rendered Withdrew cash from the business Paid business permits Received a promissory note for services rendered Made additional investment – Computer. Collected a customer’s account Paid postage and stamps Paid light and water bills (Utilities Expense) Paid the promissory note issued Paid salaries to employees. DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Effects of Transactions on the Accounting Instruction: On the space provided, indicate either Increased or Decreased on the accounting values as affected by the transactions. (No.1. is answered for your guide) Affected Transactions 1. Initial investment of Cecil Rosada 2. Billed a customer for service rendered 3. Payment of salaries and wages 4. Cash collection from customers 5. Remittance of SSS Contributions 6. Issuance of a promissory note to supplier 7. Payment of 2 years insurance premium 8. Cash withdrawal of Cecil Rosada 9. Additional investment of Cecil Rosada 10. Purchased of computer on account 11. Received a promissory note from a customer 12. Sale of an old car owned by the business 13. Advance collection of services to be rendered 14. Rendered service to customer for cash 15. Payment of promissory note issued to a supplier 16. Payment of taxes to the government 17. Payment of gasoline bills 18. Payment of 2 months advance rental 19. Collected the promissory note from a supplier 39 | P a g e Asset Increased Liabilities Owner’s Equity Increased DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CHAPTER IV EXTENDED ILLUSTRATIONS ON TRANSACTION ANALYSIS The following transactions with corresponding analyses are given to illustrate the principle of debit and credit with ready recognition of various forms of values: Transaction 1- Brought a delivery car for cash, P500,000. Analysis: In this transaction, the value we received is form of an Asset which is the delivery car, we call Delivery Equipment and the value parted with is another form of an Asset which is Cash. We then say, Debit, Asset-Delivery Equipment P500,000 Credit, Asset-Cash P500,000 Transaction 2- Sold an old typewriter for cash, P20,000. Analysis: In this transaction, the value we received is a form of an Asset which is Cash and the value we parted with is another form of an Asset which is the typewriter, we call Office Equipment. We then say, Debit, Asset-Cash P20,000 Credit, Asset-Office Equipment P20,000 Transaction 3- Bought laundry supplies on credit from SM City- Davao, P30,000. Analysis: In this transaction, the value we received is a form of an Asset which is the Laundry Supplies and the value parted with is a form of a Liability which is our “oral promise to pay”, we call Accounts Payable. We then say, Debit, Asset-Laundry Supplies P30,000 Credit, Liability- Account Payable 30,000 Transaction 4-Paid our account with SM City – Davao, P30,000 40 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Analysis: In this transaction we will get back our “oral promise to pay” as cancellation of our accounts. The value we received, therefore, is a Liability, we call Accounts Payable and the value parted with is a form of an Asset which is Cash. We then say, Debit, Liability- Accounts Payable P30,000 Credit, Asset-Cash P300,000 Transaction 5- Bought an office table on account from Emcor, P25, 000 and a promissory note was issued. Analysis: In this transaction, the value we received is a form of an Asset which is office table, we call Office Furniture & Fixture and the value parted with is out “written promise to pay” which is a Liability, we call Notes Payable. We then say, Debit, Asset-Office Furniture & Fixtures P25,000 Credit, Liability- Notes Payable P25,000 Transaction 6- Paid our account with Emcor, P25,000 and get back the promissory note we issued. Analysis: In this transaction, we will get back our “ written promise to pay” as a cancellation of our account. The value we received, therefore, is a form of a Liability, which is our written promise to pay, we call Notes Payable and value parted with is a form of an Asset which is Cash. We then say, Debit, Liability-Notes Payable Credit, Asset-Cash P25,000 P25,000 Transaction 7- Received cash, P10,000 for services rendered to a customer. Analysis: In this transaction, the value we received is a form of an Asset which is Cash and the value parted with is a form of an Income which is our “services rendered.” 41 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS When then say, Debit, Asset-Cash P10,000 Credit, Income-Service Income P10,000 Transaction 8- Rendered services to customer, P8, 000. The customer made an oral promise to pay Analysis: In this transaction, the value we received is a form of an Asset which is our “right to collect” from a customer’s account, we call an Accounts Receivable and the value parted with is form of an Income which is our “services rendered”. We then say, Debit, Asset-Accounts Receivable P8,000 Credit, Income-Service Income P8,000 Transaction 9- Collected the customer’s account, P8,000. (Refer to transaction No. 8) Analysis: In this transaction, the value we received is a form of an Asset which is Cash and the value parted with is another form of an Asset which is the cancellation of our “right to collect” from the customer, we call Accounts Receivable. When then say Debit, Asset-Cash P8,000 Credit, Asset-Accounts Receivable P8,000 Transaction 10- Rendered services to a customer, P12,000. The customer gave us written promise to pay. Analysis: In this transaction, the value we received is form of an Asset which is Cash and the value parted with is another form of an Asset which is the returned of the promissory note to the customer as a cancellation of our “right to collect”, we call Notes Receivable. We then say: Debit,Asset- Cash 42 | P a g e P12,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Credit, Asset-Notes Receivable P12,000 Transaction 12 – Mr. Alfredo Salazar invest cash of P600,000 in the business. Analysis: In this transaction, the value we received is a form of Asset which is Cash and the value parted with is an “implied interest of the proprietor, Mr. Salazar to safeguard the amount of capital he puts into the business, we call Owner’s Equity. We then say, Debit, Asset – Cash P600,000 Credit, Owner’s Equity- Salazar, Capital P600,000 Transaction 13- Mr. Alfredo Salazar withdraws cash of P5,000 from the business for his personal use. Analysis: In this transaction, the value we received is the “reduction of the proprietor’s capital”, we call Drawing and value parted with is a form of an Asset which is Cash. (Drawing is a factor that will decrease Owner’s Equity). We then say, Debit, Drawing – Salazar, Personal P5,000 Credit, Asset- Cash P5,000 Transaction 14- Paid salaries to employees for the month as follows: Total Salaries P20,000.00 Less: Deductions SSS P620.00 Philhealth 250.00 Pag-ibig 400.00 Withholding Tax 650.00 Amount of Cash to be paid 1,920.00 P18,080.00 Analysis: In this transaction, the value we received is a form of an Expense which is the “benefit we get from the services rendered by our employees”, we call Salaries Expense and the value parted with are as follows. 43 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 1. Our promise to remit to Social Security System the employees’ share which we deducted from employees’ payroll, we call a Liability-SSS Premium Payable, P620.00; 2. Our promise to remit to Philippine Health Insurance Corporation the amount of Philhealth which we deducted from employees’ payroll, we call a Liability-PhilHealth Premium Payable, P250.00; 3. Our promise to remit to Home Development Mutual Fund the employees’ share which we deducted from employees’ payroll, we call a Liability-Pag-ibig Premium Payable, P400.00 4. Our promise to remit to the Bureau of International Revenue the amount of tax which we withheld from employees’ payroll, we call a Liability-Withholding Tax Payable, P650.00; and 5. An Asset – Cash, P18,080.00 We then say, Debit, Expense- Salaries Expense P20,000.00 Credit, Liability- SSS Premium Payable P620.00 Credit, Liability- PhilHealth Premium Payable 250.00 Credit, Liability- Pag-Ibig Premium Payable 400.00 Credit, Liability- Withholding Tax Payable 650.00 Credit, Asset Cash 18,080.00 (SSS, Philhealth and Pag-ibig contributions are mandatory deductions from employees’ payroll as required by law) Transaction 15- The business (employer) gives its counterpart on SSS, Philhealth and Pag-ibig contributions. Analysis: In this transaction, the value we received is the counterpart of SSS, Philhealth and Pag-ibig as mandatory requirement by the government which is treated as “ Business Expense” and the value parted with is a Liability which is our promise to make remittance to Social Security System, Philippine Health Insurance Corporation and Home Development Mutual Fund. We then say, Debit, Expense- SSS Contribution P1,053 Debit, Expense- Philhealth Contribution 250 Debit, Expense- Pag-ibig Contribution 400 Credit, Liability- SSS Premium Payable Credit, Liability- Philhealth Prem. Payable Credit, Liability- Pag-ibig Premium Payable 44 | P a g e P1,053 250 400 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Transaction 16 The business (employer) remits what is has deducted from payroll of employees together with its counterpart contributions to social Security System, Philippine Health Insurance Corporation, and Home Development Mutual Fund. (Refer to Transaction No. 15) Analysis: In this transaction, the value we received is the fulfillment of our promise to remit which is a Liability and the value parted with is Asset –Cash. We then say, Debit, Liability-SSS Premium Payable Debit, Liability- Philhealth Prem. Payable Debit, Liability- Pag-ibig Prem. Payable Credit, Asset – Cash Social Security System Philhealth Pag-ibig Total Employee P620 250 400 1,270 P1,673 500 800 P2,973 Shares Employer P1,053 250 400 1,703 Total P1,673 500 800 2,093 Transaction 17- the business (employer) remits to the Bureau of Internal Revenue the amount of tax that was withheld from employees’ payroll, P650.00 Analysis: In this transaction, the value we received is the “fulfillment of our promise to remit” to Bureau of Internal Revenue for the income tax we withheld, we call Liability-Withholding Tax Payable and the value parted with is Asset – Cash. We the say, Debit, Liability-withholding Tax Payable Credit, Asset-Cash 45 | P a g e P650 P650 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS THE T-ACCOUNT The effect of changes in Assets, Liabilities and Owner’s Equity are being summarized in an accounting device called “account”. This device will group these accounting values with their amounts belonging to one item only. In the item “cash” for example, all amounts representing increases and decreases in cash are entered in the account “cash”. An “account” is divided into two sides. The left – hand side which is called the “debit side” and the right –hand side which is called the “credit side”. The left-hand or debit side shows the value received while the right hand or credit side shows the Value parted with of transaction analysis. The device is commonly called “T-Account” because it resembles a capital letter “T”. An account title is written above the T-Account. Shown below is the information of an “Account” ACCOUNT TITLE Left- Hand side Or Debit Side is for VALUE RECEIVED Right- Hand Side or Credit Side VALUE PARTED WITH An amount entered on the left-hand side of the account is called a “debit Entry” while the amount entered on the right- hand side called a “Credit Entry”. The moment an “ account” is assigned to an item to which a title has already been designated, such account becomes identical to the item thereafter. For instance the account assigned to the item “Cash” becomes known as “ Cash Account” ; the account assigned to the item “Notes Receivable” becomes known as “Notes Receivable Account”; the account assigned to the item “Rent Expense” become known as “Rent Expense Account” and so forth. To illustrate: 46 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Show below is a T-account for the item “Cash”: CASH Dr. Cr. (1) P25,000 (2) P10,000 As then item “ Cash” was written on top of the account, it becomes a Cash Account. The P25,000 that is being entered at the left-hand side of the account is called a debit entry. The P10,000 that is being entered at the right-hand side of the account is called a Credit Entry”. the words Debit and Credit came from the latin words “debere” and Credere. The former is abbreviated as “Dr.” and the latter as “Cr.” The words debit and credit can be used either as a verb or an adjective. As a Verb: To debit means to enter the amount of value received on the left-hand side or debit side of an account. To Credit means to enter the amount of the value parted with on the right-hand or credit side of an account. We then say, 1. Cash account was debited by P25,000.” (this means that the amount of P25,000 was entered on the debit side of the account) 2. Cash account was Credited by P10,000. This means that the amount of P10,000 was entered on the Credit side of the account) As an Adjective: The words Debit and Credit are used to describe the two sides of the account. We then say, 47 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 1. The debit side of cash account has an entry of P25,000. (the left-hand side of the account is being referred to in this case) 2. The credit side of cash account has an entry of P10,000. (the right-hand side of the account is being referred to in this case) The total of the debit amounts or debit entries of an account is called debit total while the total of the credit amounts or credit entries of an account is called Credit total. Let us assume, Cash Account has the following entries: CASH Dr. Debit Total Cr. P25,000 20,000 P45,000 P10,000 5,000 P15,000- Credit Total We then say, Cash account has a debit total of P45,000 and credit total of P15,000. AN ACCOUNT BALANCE The difference between the debit total and credit total of an account is called an “Account Balance”. If the total of the debit side exceeds the total of the credit side, the account is said to be in a “Debit Balance”, Conversely, if the total of the credit side exceeds the total of the debit side, the account is said to be in a credit Balance. If the debit total equals with that of the credit total, the account is said to be “In Balance” or “Closed Account” To illustrate: The (3) three cases are being presented to illustrate an account balance. 48 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Case 1: The “Cash Account” is used. Let us assume, Cash account has the following debit and credit entries. CASH Dr. Cr. P25,000 10,000 Debit total35,000 Debit balance P20,000 P10,000 5,000 P15,000 – Credit total In as much as the debit total (P35,000) exceeds the credit total (15,000), Cash account is said to be in “Debit Balance”, by P20,000. Hence, the account balance of P20,000 was placed on the Debit side of the account. When then say, “Cash account has a debit balance of P20,000”. Case 2: The “Accounts Payable” account is used. Let us assume, Accounts Payable account has the following debit and credit entries. ACCOUNTS RECEIVABLE Dr. Cr. Debit total P15,000 20,000 35,000 P40,000 10,000 P50,000- Credit Total 15,000- Credit balance In as much as the credit total (P50,000) exceeds the debit total (P35,000), the Accounts Payable account is said to in a “Credit Balance” by P15,000. Hence, the account balance of P15,000 was placed on the Credit Side of the account. We then say, 49 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS “Accounts Payable account has a credit balance of P15,000”. Case: the “Accounts Receivable” account is used. Let us assume, Accounts Receivable account has the following debit and credit entries: ACCOUNTS RECEIVABLE Dr. Cr. Debit total P12,000 4,000 16,000 P10,000 6,000 16,000- Credit total In as much as the debit total P16,000 equals with its credit total (16,000), the Accounts Receivable account is said to be “in-balance” or “closed account”. When then say, Accounts Receivable account has a zero balance or the Accounts Receivable account is closed.” DEBIT AND CREDIT The term debit means “left” and “Credit” means “right”. This refers to an equation where the left side is equal to the right side. If the left weights 60 pounds, correspondingly the right also weighs 60 pounds. There could be no instance that the left side weighs heavier or lighter than the right and vice versa. The final rule is the “left will always equal to the right.” BASIC ACOCUNTING EQUATION As discussed earlier, the transaction analysis had developed an equation as: VALUE RECEIVED = VALUE PARTED WITH (The amount of value received will always equal with the amount of the value parted with) 50 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS When transactions are being recorded, there also developed a related Equation as: DEBIT =CREDIT (The amount entered on the debit side of an item’s account will always have a corresponding amount entered on the credit side of another item’s account. Thus, the amount of the debit will always equal to the amount of Credit). To simplify, there are two basic elements of a business. These are 1. What it owns 2. What it owes Assets are the resources owned by the business (what it owns). Equities) are the rights or claims against these resources (what it owes). ASSETS = EQUITIES Equities may be further sub-divided into two categories: Claim of Creditors and claim of the owner . The claims of the creditors are called “Liabilities”. The claims of the owners are called “Owner’s Equity”. Therefore, liabilities and owner’s equity. The equation above can then be expanded as follows: ASSETS = LIABILITIES + ONWER’S EQUITY This equation is referred to as the basic accounting equation. This accounting equation is applied to all economic entities regardless of size, nature of business or forms of business organizations. If the owners wants to know his proprietary interest in the business or if the wants to know how much is his claim over the assets of the business, the accounting equation is restated as follows: ASSET- LIABILITIES = OWNER’S EQUITY EXPANDED ACCOUNTING EQUATION To include the Income and Expense as temporary accounts together with drawing, the accounting equation is expanded and restated as follows: 51 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS ASSETS= LIABILITIES + OWNER’S EQUITY(-Drawing+ Income-Expenses) This very equation as related to the theory of Debit and Credit must not be interpreted that Assets will always be received and therefore will always be debited and that liabilities and Owner’s Equity will always be the value parted with and should always be credited. This equation relates to the Normal Balances of the Three Account Values. NORMAL BALANCES OF ACCOUNTS The Accounting Equation, ASSETS = LIABILITIES + OWNER’S EQUITY reflects the normal balances of the three Accounting Values. This means that: ASSETS LIABILITIES - The normal balance is Debit - OWNERS EQUITY- the normal balance is Credit the normal balance is Credit The understanding of their respective normal balances is very important so that you can picture the effect of charges on these values in terms of PESOS. To easily recall their normal balances is by picturing at once the Accounting Equation. SIDE POSITIONING Additions and subtractions in the recording process are done by “Side Positioning”. As discussed earlier, an account has two sides; the debit side and the credit side. An Asset which has normal balance of a Debit is increased by entering the amount on the Debit side and is decreased by entering by entering the amounts on the Credit Side. Liabilities and Owner’s Equity which have the normal balances of Credit are increased by entering the amounts of the Credit side and are decreased by entering the amounts on the Debit Side. The other way of viewing these situations is by using the terms Positive and Negative ; Positive means Add and Negative means deduct. The normal balances of theses value and its temporary accounts are stated as Positive. 52 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS To illustrate: ASSETS Debit Side Credit Side NORMAL BALANCE FOR POSITIVE SIDE (Additions or Increases are entered here NEGATIVE SIDE Deductions or Decreases are entered here) We then say, DEBIT to increase an Asset and CREDIT to decrease an ASSET. LIABILITIES Debit Side Credit Side NEGATIVE SIDE (Deductions or Decreases Are entered here) NORMAL BALANCE OR Positive Side (Additions or Increases are entered Here) We then say, CREDIT to increase a Liability and DEBIT to decrease a Liability OWNER’S EQUITY DEBIT SIDE NEGATIVE SIDE (Deduction or Decreases Are entered here) 53 | P a g e CREDIT SIDE NORMAL BALANCE OR POSITIVE SIDE (Additions or Increases are entered here DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS We then say, CREDIT to increase an Owner’s Equity and DEBIT to decrease an Owner’s Equity the increase and decrease of an Owner’s Equity account are diagramed below: INCREASE Investments by owner Revenues DECREASE Owner’s Equity Withdrawals by owner Expenses Factors that will cause the “Owner’s Equity” to increase: 1. Investment of Owner 2. Revenues Factors that will cause the “Owner’s Equity” to decrease: 1. Withdrawal by owner 2. Expense TEMPORARY ACCOUNTS DRAWING OR PERSONAL - THE REDUCTION OF AN Owner’s Equity account arising from cash or property withdrawal of an owner is not debited to Owner’s Equity account to effect the decrease but instead debited to Drawing Account. 54 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS DRAWING OR PERSONAL DEBIT SIDE CREDIT SIDE NORMAL BALANCE OR POSITIVE SIDE (Additions or Increases are Entered here) NEGATIVE SIDE (Deduction or Decreases are entered here) We then say, DEBIT to increase Drawing and CREDIT to decrease Drawing. INCOME – all income earned of the same nature are summarized in this account. INCOME DEBIT SIDE CREDIT SIDE NEGATIVE SIDE (Deductions or Decreases Are entered here) NORMAL BALANCE OR POSITIVE SIDE (Additions or Increases Are entered here) We then say, CREDIT to increase Income and Debit to decrease Income. EXPENSES – all expenses incurred of the same nature are summarized in this account. EXPENSE DEBIT SIDE NORMAL BALANCE OR POSITIVE SIDE (Additions or Increases Are entered here) CREDIT SIDE NEGATIVE SIDE (Deduction or decreases are entered here) We then say, Debit to increase an Expense and CREDIT to decrease an Expense 55 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS To summarize, Income and Expenses are factors that affect Owner’s Equity while Expenses decreases Owner’s Equity. Owners Equity is increased by a credit to Income and is decreased by a debit to Expense. RULES OF DEBIT AND CREDIT The accounting equation reflects the normal balance of the three accounting values as well as the temporary accounts of an Owner’s Equity account. The “side Positioning” as adopted to effect the increase and decreases of their respective amounts can be gleaned further with the developed rules of debit and credit which are stated as follows: We DEBIT to: We CREDIT to: RULE 1 Increase an Asset Decrease an Asset RULE 2 Decrease a Liability Increase a Liability RULE 3 Decrease an Owner’s Equity Increase an Owner’s Equity TEMPORARY ACCOUNTS RULE4 Increase in Drawing Decrease in Drawing RULE5 Decrease an Income Increase an Income RULE6 Increase an Expense Decrease an Expense APPLICATION OF THE RULES The following selected transactions are given to illustrate the application of the rules of debit and credit through side positioning. ASSET is represented by the account Cash, LIABILITY is represented by the account “Accounts Payable”, OWNER’S EQUITY is represented by the account “ Rosario Salva, Capital”, DRAWING is represented by the account “Rosario Salva, Personal”, INCOME is represented by the account “Stationery and Office Supplies Expense”. 56 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Transaction No.1 – Mrs. R. Salva Made an initial investment of P10,000 cash. Analysis: Debit, Cash of P10,000 and credit, R. Salva, Capital of P10,000 Rule: Debit, increase in ASSET and credit, increase in Owner’s Equity. CASH Increase side (DEBIT) Decrease Side (CREDIT) 10,000 R. SALVA, CAPITAL Increase side (DEBIT) Decrease Side (CREDIT) 1) P10,000 Note the effect: CASH account: Cash was debited and the amount of P10,000 was entered on the increase side which is in its normal balance (positive) being an ASSET account. OWNER’S EQUITY Account: R. Salva, Capital was credited and the amount of P10,000 was entered on the increase side which is in its normal balance (positive) being an Owner’s Equity account. Transaction No.2. Mrs. R. Salva made an additional investment of P15,000 Cash. Analysis: Debit, Cash of P15,000 and credit, R. Salva, Capital of P15,000 Rule: Debit, increase in ASSET and credit, increase in Owner’s Equity 57 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CASH INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT) 1. P10,000 2. 15,000* P25,000 R. SALVA, CAPITAL DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT) 1. P10,000 2. 15,000* P25,000 Note the effect: CASH Account – Cash was further debited and the amount of P15,000* was entered on the increase side which had increased the amount of cash to P25,000. The amount of P15,000 was positioned at the positive side of the account to effect the increase. OWNER’S EQUITY account- R. Salva, Capital was further credited and the amount of P15,000* was entered on the increase side which had increased the amount of capital to P25,000. The amount of P15,000 was positioned at the positive side of the account to effect the increase. Transaction No.3 – Mrs R. Salva made a cash withdrawal of P20,000. Analysis: Debit, R. Salva, Drawing of P2,000 and credit, Cash of P2,000 Rule: Debit, decrease in Owner’s Equity (increase in Drawing) and credit, Decrease in Asset. 58 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CASH INCREASE SIDE (DEBIT) 1) P10,000 2) 15,000 P25,000 23,000 DECREASE SIDE (CREDIT) 3) P2,000* 2,000 R.SALVA, CAPITAL DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT) 1) P10,000 2) 15,000 P25,000 R. SALVA, DRAWING INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT) 2,000* Note the Effect: CASH account- Cash was credited and the amount of P2,000* was entered on the decrease side which had decreased the amount of cash balance to P23,000. The amount of P2,000 was positioned at the negative side to effect the decrease. OWNER’S EQUITY account – The P2,000* reduction of capital was shown in another account “R. Salva, Drawing and not on the decrease side of the “R. Salva, Capital” account. Take note that the “Drawing” 59 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS account has an opposite position with the “Capital” account. While the “Capital” account is positioned as a Credit to effect the decrease. The Capital of R. Salva had been decreased to P23,000. Transaction No.4 – Mrs. T. Salva made another cash withdrawal of P3,000 Analysis: Credit, R. Salva, Drawing of P3,000 and credit, Cash of P3,000. Rule: Debit, decrease in OWNER’S EQUITY (increase in Drawing ) and credit, decrease in ASSET. CASH INCEASE SIDE (DEBIT) 1) P10,000 2) 15,000 P25,000 P20,000 DECREASE SIDE (CREDIT) 3. P2,000 4) 3,000 5,000 R. SALVA, CAPITAL DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT) 1) P10,000 2) 15,000 P25,000 R. SALVA, DRAWING INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT) 3.. P2,000 4.. 3,000* P5,000 Note the effect: CASH account – Cash was further credited and the amount of P3,000* was entered on the decrease side. The P3,000 increased the total amount of the credit side to P5,000 while the total amount of the debit side was P25,000. In effect, the balance of cash account had been decreased to P20,000. 60 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS OWNER’S EQUITY account – the P3,000* was entered on the increase side of the “Drawing Account” which means that the increase in “Drawing Account” will further decrease the balance of the “Owner’s Equity Account” as they are in the opposite position. The “Drawing Account” had increased its balance to P5,000 which resulted to a further decrease in Owner’s Equity Account from P23,000 to P20,000. Transaction No. 5- Bought Stationery and Office Supplies on account from University Supply, P1,000. Analysis: Debit, Stationery and Office Supplies Expense of P1,000 and credit, Accounts Payable of P1,000. Rule: Debit increase in EXPENSE (Decrease in Owner’s Equity) and credit increase in LIABILITY. STATIONERY AND OFFICE SUPPLIES EXPENSE INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT) 5) P1,000 ACCOUNTS PAYABLE DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT) 5) P1,000 Note the Effect: STATIONERY AND OFFICE SUPPLIES EXPENSE- was debited and the amount of P1,000 was entered on the increase side which is in its normal balance (Positive) being an EXPENSE account. ACCOUNTS PAYABLE – was credited and the amount of P1,000 was entered on the increase side which is in its normal balance (Positive) being a LIABILITY account. Transaction No. 6- Bought Stationery and Office Supplies on account from Visayan Educational Supply, P2,500. 61 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Analysis: Debit, Stationery and Office Supplies Expense of P2,500 and credit, Accounts Payable of P2,500. Rule: Debit, increase in EXPENSE and credit, increase in LIABILITY. STATIONERY AND OFFICE SUPPLIES EXPENSE INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT) 5) P1,000 6) 2,000* ACCOUNTS PAYABLE DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT) 5) P1,000 6) 2,000* Note the Effect: STATIONERY AND OFFICE SUPPLIES EXPENSE- the amount of P2,500* was entered on the increase side (Positive) of the account which resulted to increase the amount of Stationery and Office Supplies Expense to P3,500. ACCOUNTS PAYABLE – the amount of P2,500* was entered on the increase side (Positive) of the account which resulted to increase the amount of Account Payable to P3,500. Transaction No. 7- Partial payment of account with University Supply, P600. Analysis: Debit, Accounts Payable of P600 and credit, Cash of P600. Rule: Debit, decrease in LIABILITY and credit, decrease in ASSET. 62 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CASH INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT) 1) P10,000 3) P2,000 2) 4) 3,000 15,000 __________ P25,000 7) 600* P5,600 P19,400 ACCOUNTS PAYABLE DECREASE SIDE (CREDIT) INCREASE SIDE (CREDIT) 7) 5) P1,000 6) 2,500 P3,500 P2,900 P600* ______ P600 Note the Effect: CASH account- the amount of P600* was entered on the decrease side of the account which means that “cash” will be decreased by P600. The amount of P600 has increased the credit side amount of cash to P5,600. This resulted to a further decrease of the cash account balance from P20,000 to P19,400. ACCOUNTS PAYABLE – the amount of P600* was debited and was enter on the decrease side of the account. Since it was positioned on the opposite side of the account’s normal balance (positive), it decreased its balance from P3,500 to P2,900. Transaction No. 8- Partial payment of account with Visayan Educational Supply, P1,500. Analysis: Debit, Accounts Payable of P1,500 and credit, Cash of P1,500. Rule: Debit, decrease in LIABILITY and credit, decrease in ASSET. 63 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CASH INCREASE SIDE (DEBIT) 1) P10,000 2) 15,000 ___________ P25,000 P17,900 DECREASE SIDE (CREDIT) 3) P2,000 4) 3,000 7) 600 8) 1,500* P7,100 ACCOUNTS PAYABLE DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT) 7) 8) 5) 6) P 600 P1,500* P2,100 P1,000 P 2,500 P3,500 P1,400 Note the effect: CASH Account – the amount of P1,500* was credited and entered on the decrease side of the account which means that cash will be decreased further by P1,500. This amount further increased the credit side amount to P7,100 which in effect reduced the amount of cash account from P19,400 to P17,900. ACCOUNTS PAYABLE – the amount of P1,500* was debited and entered on the decrease side of the account which means that Accounts Payable account will be decreased further by said amount. While this amount increased the debit side of the account to P2,100, in effect reduced the amount balance of the account from P2,900 to P1,400. Transaction No.9 - Received cash for services rendered to Mario Daray, P4,000. Analysis: Debit, Cash of P4,000 and credit, Service Income of P4,000. Rule: Debit, increase in ASSET and credit, increase in INCOME (increase in Owner’s Equity). 64 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CASH INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT) 1) P10,000 2) 15,000 9) 4,000 10) 6,000* P35,000 P27,900 3) P2,000 4) 3,000 7) 600 8) 1,500 P7,100 SERVICE INCOME DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT) 9) P4,000 10) 6,000* P 10,000 Note the Effect: CASH account – the amount of P6,000* was debited and entered on the increase side of the account which had increased the amount of cash balance from P21,900 to P27,900. INCOME account – the amount of P6,000* was credited and entered on the increase side which had increased the amount of Service Income from P4,000 to P10,000. The said amount was positioned on the positive side of the account to effect the increase. 65 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Shown below is the summary of DEBIT and CREDIT entries of each account: DEBIT ENTRIES Cash (ASSET) P35,000 Acct. Pay (Liability) 2,100 R. Salva, Capital (Owner’s Equity) TEMPORARY ACCOUNTS R. Salva, Drawing (PERSONAL) 5,000 Service Income (INCOME) Stationery and Office Supplies (EXPENSE) 3,500 TOTAL P45,600 CREDIT ENTRIES P7,100 BALANCE IN AMOUNT DEBIT CREDIT P27,900 3,500 1,400 25,000 25,000 5,000 10,000 ______ P45,600 10,000 3,500 P36,400 ______ P36,400 Take Note: Both the totals of Debit and Credit entries of all accounts showed an equal balance of P45,600. This proves the equality of Debit and Credit as expressed in the equation, DEBIT = CREDIT. Likewise, the difference between the debit and credit entries of each account when totaled will also result to an equal balance of P36,400. This resulted to this effect because whichever side of the account showed a bigger balance, the difference also reflects or carries the sign of the side which has a bigger balance. In the account cash for example, the “debit side” which is the “positive side” showed an amount of P35,000, while the “credit side” which is the “negative side” showed an amount of P7,100. The difference in the amount of P27,900 will bear or carry the “positive” sign and is therefore listed on the debit side of the account balance. On the other hand, the Accounts Payable account showed a bigger amount in its credit side compared to the debit side. While the credit entries showed a total of P3,500, the debit entries showed a total of P12,100. The amount of difference, P1,400 will bear or carry the “positive” sign because this account is a LIABILITY which has a normal balance of Credit. Hence, the amount of P1,400 is therefore listed on the credit side of the account balance. Balances of other accounts are analyzed on the same manner. 66 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS SUMMARY OF CHANGES IS TEMPORARY ACCOUNTS OF OWNER’S EQUITY Service Income Less: Expenses Profit P10,000 3,500 P 6,500 R. Salva,Capital, Beginning Add: Additional Investment of Salva P15,000 Profit 6,500 Total Less: R. Salva, Drawing R. Salva, Capital, End P10,000 21,500 P31,500 5,000 P26,500 Take note, that the above summary of charges in temporary accounts of owner’s equity is in itself an Income Statement because it shows Income less Expenses equals Profit. The Owner’s Equity, Beginning plus Additional Investment and Profit less Drawing equals Owner’s Equity. End which is in itself the Statement of Changes in Equity. The Summary of Changes in Accounting Values when placed in an Equation will shown the following results: ASSETS = LIABILITIES + OWNER’S EQUITY P27,900 = P1,400 + P26,500 THE ACCOUNTING EQUATION IS IN BALANCE 67 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Extended Illustration: Effects of Transactions on the Accounting Equation by using “Transactions Analyses Worksheet”. Investment by Owner Feb. 5- Mr. Cesario O. Edulan, A CPA by profession opens an account with Allied Banking Corporation in the amount of P100,000 to start with in his public practice. Analysis: there is an increase in Asset – Cash in Bank, P100,000 and a corresponding increase in Owner’s Equity – Edulan, Capital of P100,000. Plotted in our Transactions Analyses Worksheet, the specific effect of this transaction on the basic accounting equation are as follows: Feb. 5 ASSETS Cash in Bank P100,000 Mr. Cesario O. Edulan, CPA Transactions Analyses Worksheet = LIABILITIES + OWNER’S EQUITY Edulan, Capital = + p100,000- Investment We observed that the increase in Owner’s Equity is indicated to make it clear that the increase is an investment rather than revenue from operation which is eventually excluded in determining net operating income. At this point, the accounting equation is in balance, Assets equals Owner’s Equity since Liability is zero. Purchased of Equipment for Cash and Credit Feb. 9- Purchased a brand new computer, paying cash of P30,000 and made an oral promise to pay of P10,000 for the balance in later days. Analysis: there is an increase in one form of an ASSET- Equipment P40,000 and a corresponding decrease in another form of ASSET-cash in Bank, P30,000 and an increase in Liabilities-Account Payable, P10,000. 68 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1st two transactions on the basic accounting equation are as follows: Assets Cash in Bank = Equipment = Liabilities +Owner’s Equity Accounts Payable + Edulan, Capital Old Bal. P100,000 = 2/9 = +10,000 = P 10,000 - 30,000+ P40,000 New Bal. P 70,000 + 40,000 P110,000 P100,000 +P100,000 P110,000 We observed that the three specific items are affected: Cash in Bank is decreased by P30,000; Equipment is increased by P40,000 and Accounts Payable is increased by P10,000. This result to have a total assets of P110,000 against total liabilities and owner’s equity of P110,000. The equation is maintained. Rendered Professional Service for Cash and Credit Feb. 18- Rendered professional service, re-management consultancy, P35,000. The client paid P20,000 cash and made oral promise to pay for the balance of P15,000 in later days. Analysis: There is an increase in one form of an Asset –Cash in Bank P20,000, an increase in another form of an Asset- Accounts Receivable, P15,000 and a corresponding increase in Owner’s EquityEdulan, Capital (Professional Income) of P35,000. Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1st three transactions on the basic accounting equation are as follows: Assets Cash in Accounts Equipment Bank Receivable _________ Old Bal P70,000 P40,000 2/18 + 20,000 + 15,000 __________ 69 |P90,000 P a g e + 15,000 + New Bal P40,000 P145,000 = Liabilities Accounts Payable = P10,000 ________ = P10,000 + + P145,000 Owner’s Equity Edulan, Capital P100,000 + 35,000 P135,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS We observed that three specific items are affected: Cash in Bank has increased by P20,000; Accounts Receivable has increased by P15,000 and Edulan, Capital (Professional Income) has increased by P35,000. Why increased Owner’s Equity by P35,000 when only P20,000 has been collected? Because the inflows of assets resulting from the earning of revenues does not have to be in the form of cash. Remember that owner’s equity is increased when revenues are earned. At this point, the accounting equation remains in balance at P145,000. Withdrawal by Owner Feb 24- Mr. Edulan withdraws Cash of P20,000 for his personal use. Analysis: There is a decrease in Owner’s Equity- Edulan, Capital of P20,000 (increase in Drawing) and a corresponding decreased in ASSET – Cash in Bank P20,000. Plotted in our Transactions Analyses Worksheet. The specific and cumulative effects of this 1 st four transactions on the basic accounting equation are as follows: Assets Cash in Bank Old Bal. P90,000 2/24 - 20,000 = Liabilities Accounts Accounts Receivable Equipment Payable P15,000 P40,000 = P10,000 _______ _______ ________ New Bal. P70,000 + P15,000 + P40,000 = P10,000 P125,000 + + P125,000 Owner’s Equity Edulan, Capital P135,000 - 20,000 drawing P115,000 We observed that this transaction results in an equal decrease in Assets- Cash in Bank Owner’s Equity – Edulan, Capital by P20,000. Observe further that the effect of cash withdrawal by the owner is the opposite of the effect of an investment by owner. Owner’s drawing does not represent expenses. Like owner’s investment, it is not included in determining net income. PAYMENT OF EXPENSES 70 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Feb. 28- the business paid rental expense of P2,000 and salaries to office aide, P3,000. Analysis: There is a decrease in Owner’s Equity- Edulan, Capital of P5,000 (increase in Rental Expense, P2,000 and Salaries Expense, P3,000) and a corresponding decrease in asset – Cash in Bank, P5,000. Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1st five transactions on the basic accounting equation are as follows: Assets Cash in Bank Old Bal. P70,000 2/24 - 20,000 = Liabilities Accounts Accounts Receivable Equipment Payable P15,000 P40,000 = P10,000 _______ _______ ________ New Bal. P70,000 + P15,000 + P40,000 = P10,000 P125,000 + Owner’s Equity Edulan, Capital P115,000 - 20,000 drawing + P115,000 P125,000 We observed that this transaction results in an equal decrease in Assets- Cash in Bank and Owner’s Equity- Edulan, Capital by P20,000. Observe further that the effect mof cash withdrawal by the owner is the opposite of the effect of an investment by owner. Owner’s drawing does not represent expenses. Like owner’s investment, it is not included in determining net income. PAYMENT OF EXPENSES Feb. 28- The business paid rental expense of P2,000 and salaries to office aide, P3,000. Analysis: There is a decrease in Owner’s Equity- Edulan, Capital of P5,000 ( increase in Rental Expense, P2,000 and Salaries Expense, P3,000) and a corresponding decrease in Asset- Cash in Bank, P5,000. Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1st five transactions on the basic accounting equation are as follows: 71 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Assets = Liabilities Cash in Bank Old Bal P70,000 Accounts Receivable P15,000 2/28 - 5,000 New Bal P65,000+ ________ 15,000 + P120,000 Equipment P40,000 = Accounts Payable P10,000 _________ P40,000 = _______ P10,000 + + P120,000 Owner’s Equity Edulan, Capital P115,000 2,000 Rental Exp. - 3,000 Salaries Exp P110,000 We observed that these payments result in equal decrease in Assets- Cash in Bank by P5,000 and Owner’s Equity – Edulan, Capital (for expenses of P5,00). At this point, we have included the equality of the equation: Assets, P120,000= Liability, P10,000 and Owner’s Equity of P110,000. Assets Cash in Bank 2/5 2/9 2/18 2/24 2/28 P100,000 - 30,000 + 20,000 + - 20,000 - 5,000 _______ P65,000 + 72 | P a g e = Liabilities Accounts Receivable + Accounts Payable Equipment Owner’s Equity Edulan, Capital P100,000 Investment + P40,000 + P10,000 15,000 ________ P15,000 + P120,000 _________ P40,000 = ________ P10,000 + P120,000 +35,000 (Professional Income) - 20,000 (Drawing) - 2,000 Rental Exp. - 3,000 Salaries Exp. P110,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS DRAFTING FINANCIAL STATEMENTS From the summary of transactions, an outright drafting of financial statements can be drawn-up as follows: C.O EDULAN,CPA Income Statement For the month ended 28,Feb. 20A Revenue: Professional Income Operating Expense: Rental Expense P2,000 Salary Expense 3,000 Profit P35,000 5,000 P30,000 C.O. EDULAN, CPA Balance Sheet As of 28, Feb. 20A Assets Cash in Bank Accounts Receivable Equipment Total Assets P65,000 15,000 40,000 P120,000 Liabilities and Owner’s Equity Accounts Payable C. Edulan, Capital Total Liabilities and Owner’s Equity 73 | P a g e P10,000 110,000 ______ P120,000 C.O. EDULAN, CPA Statement of Changes in Owner’s Equity For the month ended 28,Feb. 20A C. Edulan, Capital beg. Add: Profit Total Less: Drawing C. Edulan, Capital end P100,000 30,000 P130,000 20,000 P110,000 C.O. EDULAN, CPA Statement of Cash Flows For the month ended 28 Feb. 20A Cash Flows from Operating Activities: Cash collected from clients Cash payment to rental Cash payment to salary Net cash provided by (used in Operating activities Cash Flows from Investing Activities Purchased of Equipment Net Cash provided by (used in Investing activities Cash Flows from Financing Activities Investment by owner Withdrawal by owner Net cash provided by (used in Financing activities Net Increase (Decrease in Cash Cash Balance at the beginning of the period Cash Balance at the end Of the period P ( ( P 20,000 2,000) 3,000) 15,000 ( ( 30,000) 30,000) ( P 100,000 20,000) 80,000 P 65,000 ____________ P 65,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL BASIC ACCOUNTING EQUATION The information of an Accounting Equation is presented below. Fill in the amounts in each of the Accounting Value affected by the given transactions. For your guide, the “BALANCES” of each value is already given and transaction No. 1 is answered. Use a parenthesis sign for the decrease. TRANSACTIONS 1. Mrs. Loreta Mercado invested cash of P150,000 ASSETS LIABILITIES P150,000 +CAPITAL P150,000 2. Rendered service to a client on account, P4,000 3. Bought computer on account, P40,000. 4. Mrs. Loreta Mercado withdrew cash of P5,000. 5. Paid office rental for the month P1,000. 6. Partial payment of account, P3,000. 7. Mrs. Loreta Mercado invested office table, P10,000 8. Partial collection of client’s account, P2,000 9. Borrowed money from a bank and issued a note, P10,000 10. Partial payment of account, P2,000 11. Paid taxes and licenses and other assessments, P1,000 12. Paid the bank for borrowed money, P10,000 13. Received cash for services rendered, P3,000 14. Bought office supplies on account, P5,000 (Expense) 15. Full payment of account (Office Supplies ) P5,000 BALANCES 74 | P a g e P190,000 P35,000 P155,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Determination of Account Debited and Credited Instruction: Based on the given account titles determine the debit and credit accounts and amounts. Write it on your columnar. List of Account Titles Assets Cash in Bank Accounts Receivable Office Equipment Owner’s Equity Evelyn Basa, Capital Evelyn Basa, Drawing Income Liabilities Accounts Payable Unearned Professional Income SSS Premium Payable Philhealth Premium Payable Professional Fees Income Expenses Salaries Expense SSS Contribution Philhealth Contribution Taxes and Licenses Jan 1- Evelyn Basa Invest cash of P100,000 in the accounting and auditing firm. 5 Rendered professional service for cash, P6,0000. 10 Bought computer on account, P30,000 18 Paid taxes and licenses to the government, P2,000 21 Withdrew P5,000 cash for her personal use. 25 Received cash in advance for professional services to be rendered, P7,000. 30 Paid salaries for the month. Salaries P10,000 Less: SSS P333.40 Philhealth 125.00 458,40 Net Payroll P9,541.60 30 The employer’s share are follows: SSS, P526.60 and Philhealth, P125.00 75 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Entering Entries Direct to T-accounts The analyses in each of the given transactions are presented below: write it in your columnar. ANALYSES Transactions Debit Number 1 2 3 4 5 6 7 8 Account Cash on Hand Accounts Receivable Office Equipment Rent Expense Cash on Hand Daylinda Alfetche Drawing Accounts Payable Cash on Hand Credit Amount P175,000 25,000 50,000 5,000 7,000 3,000 20,000 15,000 Account Daylinda Alfenche, Capital Service Income Accounts Payable Cash On hand Accounts Receivable Cash on Hand Cash on Hand Service Income Amount P175,000 25,000 50,000 5,000 7,000 3,000 20,000 15,000 Requirements: A. Make T-accounts for following: Cash on Hand; Accounts Receivable; Office Equipment; Accounts Payable; Daylinda Alfeteche, Capital ; Daylinda Alfetche, Drawing; Service Income and Rent Expense accounts. B. Enter in the T-accounts you have prepared, the given analysis of each transaction and determine the balance of Each of the account. C. Determine the amounts of the Total Assets, Total Liabilities and Owner’s Equity (These include Drawing, Income and Expense accounts). D. Place the total of each of the accounting value in the equation A=L+P and try to see if the equation is “in balance” 76 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL NORMAL BALANCE OF ACCOUNTS Instruction: On the space provided, indicate whether the normal balance of each of the given accounts is a Debit or Credit: 1. Notes Payable 2. Taxes and Licenses 3. Cash in Bank 4. Accounts Payable 5. Alex Ajoc, Capital 6. Insurance Expense 7. Interest Income 8. Unused Supplies 9. Alex Ajoc, Drawing 10. Miscellaneous Expense ________ _______ ________ ________ ________ ________ ________ ________ ________ ________ 11. Prepaid Insurance 12. Notes Payable 13. Prepaid Rent 14. Interest Expense 15. Professional Income 16. Utilities Expense 17. Supplies Used 18. Office Equipment 19. Rent Expense 20. Land __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ EFFECTS OF ACCOUNT BALANCES Instruction: On the space provided, indicate a check mark to accounts which will increase their balances when debited. _________ ________ _________ _________ _________ 1. Accounts 2. Commission Income 3. Furniture and Fixture 4. Melindo Bidad, Capital 5. Prepaid Advertising 77 | P a g e _________ _________ _________ _________ _________ 6. Rent Expense 7. Notes Receivable 8. Melindo Bidad, Drawing 9. Insurance Expense 10. Accounts Payable DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CHAPTER V THE ACCOUNTING PROCESS OF A SERVICE CONCERN Step 1 IDENTIFYING Step 2 JOURNALIZING Step 3 POSTING Step 4 TRIAL BALANCE Step 5 ADJUSTING ENTRIES Step 10 REVERSING ENTRIES Step 9 POST-CLOSING TRIAL Step 8 CLOSING ENTRIES Step 7 FINANCIAL STATEMENT Step 6 WORKSHEET BALANCE ”Accounting cycle refers to the various steps of the accounting process which are being passed – through in a repetitive manner from the start up to the end of every accounting period regardless of some variations in the accounting procedures” 78 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS IDENTIFYING TRANSACTIONS (1st Step of the Accounting Process) The actual sequence of events begins with the identification of transactions. What transactions are considered as accountable and what are not. The rule is, only transactions and events which are of financial bearing to the business are being recognized. The basis of identifying transactions are the supporting business documents that are on file or yet to be filed as evidence of transactions to assure the reliability and verifiability of accounting records. The most common documents of a service concerns business are customers’ and suppliers sales invoices, official receipts, purchase orders, receiving reports, delivery receipts, cash vouchers, checks, etc. After identifying, follows next is analyzing. By analyzing, we have to ask this questions to ourselves. “What is the value received and the parted away in this particular transactions”? while we answered that “mentally” we then come to measuring of the transaction. This time; we used the peso as our financial denominator. First Document Purchase order is the first document that Davao Laundry Services should fill-up in placing orders Second Document In the second document SM CityDavao, the supplier, issued a Charge Invoice to Davao Laundry Services. The charge invoice showed that Mr. Santos acknowledged to have received the goods. In this narrative transaction, this could be interpreted as follows: “Purchased laundry supplies on account from SM City- Davao, P35,000 79 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Third Document The third document is a Check Voucher. This is used to accompany a Check (fourth document) whenever payment is made by customer, Davao Laundry Services. In the narrative transaction, this could be interpreted as follows: “Partial payment of account made by Davao Laundry Services to SM City-Davao P25,000 Fourth Document The fifth document is to be prepared by SM City- Davao, the supplier which is an Official Receipt acknowledging to have received payment from Davao Laundry Services. These complete the transactions between Davao Laundry Services, the customer and SM CITY- Davao, the supplier. 80 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS ND (2 JOURNALIZING Step of the Accounting Process) DOUBLE – ENTRY SYSTEM OF BOOKKEEPING The double- entry system of bookkeeping recognizes the two- fold effects of transaction; the value received, we call a debit and the value parted with, we call a credit. This justifies the equality of debit and credit amounts. Because of the two-fold effect recognition, both sides of the fundamental equation are always equal. They are in the state of “equilibrium”. This textbook illustrates the double-entry system of bookkeeping. BOOKS OF ACCOUNTS The records that are used and kept by the business in storing all of the accounting data are called “Books of Accounts”. These books are with ready or prepared design to fit the need of the business and also to provide convenience for the accountants in pursuing the primary objectives of accounting which is “communication ”through the Financial Statements. There are two sets of books that are used by the business. They are the “book of original entry” and the “book of final entry”. The book of original entry is called JOURNAL which is of two kinds; the “GENERAL JOURNAL” and the “SPECIAL JOURNAL”. This is called the book of original entry because it is in this book where transactions are recorded for the first time. The book of final entry is called the 81 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS “LEDGER” which is also of two kinds; the “GENERAL LEDGER” and the “SUBSIDIARY LEDGER”. This is called book of final entry because it is in this book where transactions that were recorded in the Journal are transferred for final recording. Special Journal and Subsidiary Ledgers are discussed in the succeeding chapters. GENERAL JOURNAL A General Journal can that be of a “loose-leaf” or “book-bound” form. It has the following columnar headings: DATE COLUMN – Show the date when the transactions took place. PARTICULARS- Shows the item or the accounts debited and credited as a result of a transaction analysis as well as a brief or concise explanation of what the transaction is about. FOLIO- Shows the number of an account in a ledger or page of a ledger to which it was transferred. Folio is the latin word for “page”. It is also called a “reference”. DEBIT COLUMN – this is a money column showing the peso amount of the value received in a transaction. CREDIT COLUMN- this is the money column showing the amount of the value parted with in a transaction. Shown below is a page of a General Journal: 82 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS GENERAL LEDGER A general ledger can that also be of a ”loose-leaf” or “book bound” form. This book will group items of accounts of the same skind, class or nature. Each item or account is being provided with a leaf of a ledger. For this reason, a ledger is also called “group of accounts”. A general ledger has two sides; the left-hand side which is called a debit side and the right-hand side which is called a credit side. Each side has the column for the following: DATE COLUMN – Shows the date of the transaction that occurred as recorded in the Journal; 83 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS PARTICULARS – shows a brief but a concise explanation of the transaction as shown in the Journal. This is sometimes called “Explanation””Description” or “Item”. FOLIO –shows the page number of a Journal where entries are taken from; MONEY COLUMNS - The debit money column shows the amounts that are transferred from the debit money column of the Journal while the credit money column shows the amounts that are transferred from the credit money column of the Journal. Shown below is a page of a GENERAL LEDGER. a. To be used under manual accounting system. b. To be used under computer- based accounting system At the end of the accounting period, the debit and credit entries of its item or account in the ledger are totaled. If the debit side total is bigger than the credit side total, the difference in amount is called “DEBIT BALANCE”. We then say, the account is a debit balance. On the other hand, if the credit side total is bigger that the debit side total, the difference in amount is called “CREDIT BALANCE “ We then say, the account is a credit balance. If both totals of debit and credit sides are equal, the account is said to be “IN-BALANCE” or “CLOSED ACCOUNT” RECORDING PROCESS RECORDING is the first phase of Accounting. This involves the writing down of business transaction in a systematic manner and in order of their occurrence in the book of original entry called Journal. The act of recording business transactions in the Journal is called “JOURNALIZING” which is the second 84 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS step of the accounting process. The entry that is made in the journal is called “JOURNAL ENTRY”. A journal entry may be “SIMPLE” or COMPOUND. A simple journal entry is one that has one debit item with a debit amount and one credit item with a credit amount. Shown below is the formation of a simple journal entry: A compound journal entry is one that may have one debit item and two or more credit items; two or more debit items and one credit item; or may have two or more items on both sides. Also shown below is the formation of a compound journal entry with two debit and credit items: 85 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CHART OF ACCOUNTS When transactions are recorded in the genereal journal, account titles are being used. A list of account titles are prepared beforehand to guide bookkeeper and accountant of what specific titles are to be used in describing the exchange of values in transaction. This list of account titles is called “Chart of Accounts” Shown below is the chart of accounts of DAVAO LAUNDRY SERVICES, a laundry business that is owned and managed by Mr. Severo Santos. The chart of account titles which are arranged in this order: ASSETS, LIABILITIES, OWNER’S EQUITY, INCOME and EXPENSES. If a transaction involves an account title which is not included in a given chart, the bookkeeper may create an account title that he thinks more appropriate to use in describing the exchanges of values. DAVAO LAUNDRY SERVICES Chart of Accounts Balance Sheet Accounts Assets Income Statements Accounts Income Page No. Account No. Page No. Account No. 1 2 3 4 5 6 111 112 112-A 113 114 114-A 13 441 7 8 9 Liabilities 221 Notes Payable 222 Accounts Payable 223 Accrued Advertising 10 11 12 Cash in Bank Accounts Receivable Allow for Bad Debts Laundry Supplies Laundry Equipment Accu. Depreciation Owner’s Equity 331 S. Santos, Capital 332 S. Santos,Drawing 333 Income & Expense Summary 86 | P a g e Laundry Income Expenses 14 15 16 17 18 19 20 21 22 551 552 553 554 555 556 557 558 559 Bad Debts Depreciation Expense Salaries Expense Rent Expense Utilities Expense Laundry Supplies Expense Taxes and Licenses Advertising Expense Interest Expense DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS GENERAL JOURNAL ENTRY PAGE 1 87 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS PAGE 2 88 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS CORRECTING AN ERRONEOUS JOURNAL ENTRY Neatness in recording transactions must be observed. Various erasures especially in the Journal might lead to suspicions that there are manipulations done to cover-up some fraudulent and dishonest practices. Although these may be honest mistakes, erasures destroy neatness of records and impair their values. Correction of errors in the Journal depends upon the following circumstances; 1. When the error was immediately discovered prior to posting of entries to the ledger, the correction can be made by crashing out or drawing a single line through the wrong items or accounts and writing the correct amount or item above the cancelled one. This also can be done in figures if in error. Example: “bought a computer on account, P50,000” The above transaction was erroneously recorded in the General Journal as follows: Office Supplies P5,000 Accounts Payable P5,000 Computer on Account Since the correct account that should have been debited is Office Equipment (asset) and not Office Supplies Expense, the correction is illustrated as follows: 89 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 2. By preparing a correcting journal entry if the error was committed right after posting to the ledger has been done and the impossibility of crashing over the entry is very evident and clear. Example: “Bought a computer on account, P50,000”. The erroneous journal entry has been recorded as follows: WRONG ENTRY Office Supplies Expense P50,000 Accounts Payable Bought Computer on Account P50,000 CORRECT ENTRY Office Equipment P50,000 Accounts Payable Brought computer on Account P50,000 CORRECTING ENTRY Office Equipment P50,000 Office Supplies Expense P50,000 To reclassify the former to the latter account. 3. A journal entry has not been made or omitted. Like in letter writing, if there is an important message that we forgot to write in the body of the letter, we can make a postscript (P.S) or additional message. In accounting, we also have to do the same manner by way of an “adjusting entry”. a. If the recorded or omitted transaction is “rendered services on account, P2,000”, the usual journal entry is prepared as follows: Accounts Receivable Service Income 90 | P a g e 2,000 2,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Service on Account. POSTING TO THE LEDGER AND TRIAL BALANCE PREPARATION (3RD AND 4TH STEPS OF THE ACCOUNTING PROCESS) Learning Objectives After studying this chapter, we should be able to: 1. Acquaint the proper use of a ledger under the manual accounting system and develop skills in the posting process. 2. Prepare a trial balance and learn how to locate errors in the trial balance. POSTING TO THE LEDGER After the transaction has been recorded in the Journal, the entries in the Journal will then be transferred to another book called “Ledger” for final recording. The process of transferring entries from the journal to the Ledger is what we call “Posting” which is the third step of the accounting process. Posting simply means updating the ledger accounts for the effects of the transactions recorded in the journal. It is merely copying carefully what has been footed in the ledger. The transfer of entries from the Journal to ledger is actually the sorting process which means putting each in certain place according to its kind, class or nature. This refers to “Classifying”, which is the second phase” of accounting. In manual accounting systems this can be a tedious and time- consuming process; but in computer-based systems, it is usually done instantly and automatically. In addition, computerized posting greatly reduces the risk of errors. 91 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS GENERAL JOURNAL Most businesses, especially large companies, may adopt different kinds of journals but all business organizations use the most basic type of journal which is the general journal. The general journal typically displays the transaction’s date, account titles and explanations, references, and respective amounts of corresponding accounts. A sample format of a journal is shown as follows. Date 2016 Account Titles and Explanation 1 Cash January 1 Shayne, Capital Ref. 2 101 3 Debit 4 Credit 200,000 301 200,000 Owner’s investment of cash in the business January 2 Property, Plant and Equipment Shayne, Capital 140 50,000 301 50,000 Owner’s investment of equipment in the business January 3 Inventory 121 Cash 101 20,500 20,500 Purchase of inventories from supplier through cash January 4 Accounts Receivable Sales 111 50,000 400 50,000 Sale of inventory to customer on account Cost of Goods Sold Inventory 500 15,000 121 15,000 Sales of inventories to customer January 8 Inventory Accounts Payable 121 40,000 201 40,000 Purchase of inventories from supplier on account January Cash 92 | P a g e 101 60,000 5 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 12 Sales 400 60,000 Sale of inventories to customer January Cash 14 Accounts Receivable 101 24,000 111 24,000 Collection of customer’s account receivable January Sales Return 15 Accounts Receivable 401 5,000 111 5,000 Return of merchandise from customer Inventory Cost of Goods Sold 121 1,500 500 1,500 Return of merchandise from customer January 25 Accounts Payable Cash 201 10,000 101 10,000 Payment of accounts payable to suppliers January 30 Shayne, Drawing Cash 302 2,000 101 2,000 Withdrawal of cash from the business for her personal use January 31 Salaries Expense Cash 505 101 5,000 5,000 Paid salaries to employees for the month Note: Transactions of the company are journalized in chronological order in the General Journal. 1. Date: The date at which the transaction occurred. 2. Account Titles and Explanation. The account to be debited and the account to be credited are recorded. The account titles are referenced to the Chart of Accounts. Correct and proper usage of the account titles are necessary for clear and accurate presentation of amounts in the financial 93 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS statements. In the given illustration, account titles used are (1) cash, (2) property, plant and Equipment, (3) Shayne, Capital, (4) Inventories, etc. Notice that the accounts credited are indented. Also a brief explanation of the business transaction is described. In the January 1 journal entry, a brief explanation was stated as follows: Owner’s investment of cash in the business. 3. Reference Number. Reference number of each account journalized. The Ref. column is left bank during the journalizing process and is filled out during the posting process. 4. Debit. Corresponding amount of the account debited is entered. In the January 1 Journal entry, the accounts Cash and Property Plant and Equipment are debited for 200,000 and 500,000, respectively. 5. Credit. Corresponding amount of the account credited is entered. In the January 1 journal entry, the account Shayne, Capital is credited for 50,000. With the foregoing illustration, we can see the significance of the journal in the accounting process. First, it shows a chronological record of the company’s transactions. General Ledger The general ledger contains all the asset, liability, and owner’s equity accounts of the company. Unlike journal that are arranged chronologically (regardless of the accounts), the ledger are usually grouped according to their chart of accounts and arranged according to the order on how they appear o the financial statements, starting from the asset accounts, followed by the liability accounts, and finally, the equity accounts including the revenues and expenses accounts as shown in the figure. Each account is numbered based on the chart of accounts for easier and faster reference. The general ledger shows the amount outstanding on each of the company’s accounts as of a certain date. 94 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS ASSET ACCOUNTS OWNER’S EQUITY ACOCUNTS LIABILITY ACCOUNTS Property, plant and Equipment Loans Payable Salaries Payable Interest Payable Inventory Account Receivable Cost of Goods Sold Sales Shayne, Drawing Accounts Payable Cash Shayne, Capital Using the information from the sample general Journal, a sample format of general ledger is illustrated as follows: STEP 3- Posting The summary (in specialized journals) or individual transactions (in the general journal) are then posted from the journals to the general ledger (and subsidiary ledgers). Nothing should ever get posted to the ledgers without first being entered in a journal CASH .Date NO.101 Explanation Ref Debit JAN 1 Investment of Capital by Owner J1 200,000 3 Purchase of inventories from supplier J1 12 Sale of inventories to customer 14 Collection Credit Balance 2015 receivable 95 | P a g e of customer’s accounts J1 200,000 20,500 179,500 60,000 239,500 24,000 263,500 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 25 Payment of accounts payable to supplier J1 10,000 253,500 30 Withdrawal of cash from the business J1 2,000 251,500 31 Paid salaries to employees for the month J1 5,000 246,500 Balance 246,500 ACCOUNTS RECEIVABLE NO.111 2015 Explanation Ref Jan 4 Sale of inventories to customer on J1 Debit Credit 50,000 Balance 50,000 account 14 Collection of customer’s account J1 24,000 26,000 5,000 21,000 receivable 15 Return of merchandise from customer J1 BALANCE 21,000 INVENTORY NO. 121 2015 Explanation Ref Jan3 Purchase of inventories from supplier J1 Debit Credit 20,500 Balance 20,500 through cash 4 Sales of inventories to customer J1 8 Purchase of inventories from supplier on J1 15,000 40,000 5,500 45,500 account 12 Sale of inventories to customer 15 Return of merchandise from customer 31 BALANCE 18,000 J1 1,500 27,500 29,000 29,000 PROPERTY, PLANT AND EQUIPMENT 2015 Explanation Ref JAN 2 Owner’s investment of equipment in the J1 NO. 140 Debit Credit 50,000 Balance 50,000 business 31 BALANCE 50,000 ACCOUNTS PAYABLE 96 | P a g e NO.201 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 2015 JAN 8 Purchase of inventories from supplier on J1 40,000 40,000 account 25 Payment of accounts payable to supplier 31 BALANCE J1 10,000 30,000 30,000 SHAYNE, CAPITAL NO. 301 2015 Jan1 Investment of Capital by owner J1 200,000 200,000 2 Owner’s investment of equipment J1 50,000 250,000 31 BALANCE 250,000 SHAYNE, DRAWING NO. 302 2015 JAN 1 Withdrawal of Cash from the business 31 BALANCE J1 2,000 2,000 2,000 SALES NO. 400 2015 JAN 4 Sale of inventories to customer account J1 50,000 50,000 12 Sale of inventories to customer J1 60,000 110,000 31 BALANCE 110,000 SALES RETURN NO. 401 2015 15 Return of merchandise from customer 31 BALANCE J1 5,000 5,000 5,000 COST OF GOODS SOLD NO. 500 2015 4 Sales of investment to customer J1 15,000 15,000 12 Sale of inventories to customer J1 18,000 33,000 15 Return of merchandise from customer J1 97 | P a g e 1,500 31,500 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 31 BALANCE 31,500 SALARIES EXPENSE NO. 405 2015 JAN 31 Paid salaries to employees for the J1 5,000 5,000 month 31 BALANCE 5,000 1. Account title. The general ledger contains all of company’s accounts and its balances. Each Taccount is labeled with its corresponding account title(e.g. Cash, Accounts Receivable, Accounts Payable, Retained Earnings etc. 2. Ledger Account Reference Number. With reference to the company’s Chart of Accounts, each of the account titles corresponds to a reference number. In the above example, the Cash account is assigned to Reference Number 101 while the Accounts Receivable account corresponds to Reference Number 111. 3. Date. The date of the transaction is also entered in reference to the journal. 4. Explanation. A brief description of the business transaction is defined. This is sometimes omitted since the entries on the journal already provide an explanation of the transaction. 5. Reference. This column displays the journal page number from which the transaction was posted. 6. Debit. Amounts debited to the account are inputted. 7. Credit. Amounts credited to the account are entered. 8. Balance: What distinguished a ledger from the journal is the running outstanding balances provided by the ledger. After every transaction, the balances of each of the accounts are known without the need for further computations. On years-end, these balances will be the basis of the amounts presented in the financial statements of the company. With the illustration, it will be easier for the company to determine the balances of each of its accounts. These are as follows: 98 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS ASSETS 1 1 1 1 Cash 246,500 Accounts Receivable 21,000 Inventory 29,000 Property 50,000 LIABILITIES 1 Accounts Payable 30,000 EQUITY 1 1 1 1 1 1 Shayne, Capital Shayne, Drawing 250,000 2,000 Sales 110,000 Sales Return 5,000 Cost of Goods Sold 31,500 Salaries Expense 5,000 The general ledger aids in knowing the balances of each of the accounts at any given time. Unlike the journal. the general ledger classifies the transactions into accounts and provides the outstanding balances of each. Additionally, the general ledger, together with the subsidiary ledgers, serves as control account to check for errors and misstatements in posting. At month-end or year end, the company reconciles the balances of its general ledger and subsidy ledgers. 99 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS FOOTING THE LEDGER After posting the journal entries to the ledger, the amounts of debit and credit are being totaled and usually done at the end of each month. This is called “footing”. FOOTING is the process of adding each of the two amount columns of an account or item in the general ledger and finding their balances thereof. In footing the account, a well-sharpened pencil should be used in writing the total of the amount and the account balance. if an account is a debit balance (debit total is bigger than the credit total), the amount of difference is placed on the “particular” column of the credit side. If there is only one entry in any side of an account in the ledger, no footing is done and the entry is left “as is” Footing is merely the total of the column and if error is committed, it may be erased and corrected easily because pencil was being used. Footing is not considered an entry posted in the general ledger. In a computer- based systems wherein a three- money column ledger is used , footing is no longer necessary because the account maintains a running balance. PREPARATION OF JOURNAL ENTRIES Through the use of specialized journals (such as those for sales, purchases, cash receipts and cash disbursement) and the general journal, transactions and events are entered into the accounting records. These are called the books of original entry. Debits and Credits are an integral part of the journalizing process. In accounting, debits or credits are abbreviated as DR and CR respectively. When to debit and when to credit: An increase in asset account is called debit and an increase in a liability or equity account is called a credit. Likewise, if we decrease an asset account we credit that account. On the other side of the equation, if we decrease a liability or equity account we debit those accounts. Rules of Debit and Credits 1 The name of the account to be debited is always listed first. The debited account is listed on the first line with the amount in the left of the register. 100 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 1 The credited account is listed on the second line and is usually indented. The credited amount is recorded on the right side of the register. 1 The total amount of debit should always equal the total amount of credit. ACCOUNT CODE ACCOUNT TITLE Statement of Financial Position Accounts ACCOUNT CODE ACCOUNT TITLE Income Statement Accounts 1000 Cash 4000 Service Revenue 1200 Accounts Receivable 4100 Sales 1201 Allowance for Bad 4101 Sales Returns and Debts Allowances 1300 Inventory 4102 Sales Discounts 1400 Prepaid Expenses 4150 Interest Income 1500 Supplies 5000 Cost of Sales 1600 Office Equipment 5100 Purchase 1601 Accum. Deprn-Off. 5101 Purchase Returns Eqpt and allowances 1650 Store Equipment 5102 Purchase Discount 1651 Accum. Deprn. Store 5103 Freight In Eqpt. 1680 Transportation Equipment 1681 Accum Deprn- Trans Salaries Expense 6100 6150 Supplies Expense Eqpt 1750 Building 6200 Utilities Expense 1751 Accum. Deprn- Building 6220 Communication Expense 101 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 1800 Land 6250 Travel Expense 1900 Intangible Assets 6300 Rental Expense 2000 Accounts Payable 6350 Fuel Expense 2100 Notes Payable 6400 Advertising Expense 2200 Accrued Expenses 6410 Delivery Expense 2201 Salaries Payable 6450 Commission Expense 2202 Utilities Payable 6500 Depreciation Expenses 2300 Income Taxes Payable 6600 Taxes and Licenses 3000 Owner’s, Capital 6700 Interest Expense 3100 Owner’s Withdrawal Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his computer repair shop on February 14,2016, naming it Matapang Computer Repairs. Pedro knows that business transactions should be separated from personal finances. Thus, he decided to invest PHP200,000 in this business. He deposited the amount with Nation Bank. Entry: GENERAL JOURNAL Date Account Title and Explanation 2/14/16 Cash Ref Debit Credit 200,000 Mataoang, Capital 200,000 To record the initial investment of owner P. Matapang Notice that we have debited Cash, an asset account and credited Matapang, Capital, an equity account. 102 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS FEBRUARY `15,2016- Pedro purchased one computer unit from XY Computer Store to be used for the business. He issued check number 001 amounting to PHP25,000. Entry: GENERAL JOURNAL Date Account Title and Explanation 2/15/16 Office Equipment Ref Debit Credit 25,000 Cash 25,000 To record the purchase of one computer unit Notice that the debit to office equipment increased the asset account and the credit to cash decreased the asset account. FEBRUARY 16,2016- Pedro hired Juana Magaling, an experienced secretary. Entry: No Entry. This is not a financial transaction. FEBRUARY 17,2016 - Repaired the computer of Jean and collected PHP10,000 GENERAL JOURNAL Date Account Title and Explanation 2/17/16 Cash Ref Debit Credit 10,000 Service Revenue 10,000 To record receipt of cash from customer FEBRUARY 18,2016- Repair Mike’s computer. However, Mike will pay PHP15,000 on March 18,2016 GENERAL JOURNAL Date Account Title and Explanation 2/18/16 Accounts Receivable Service Revenue To record services rendered to a customer on 103 | P a g e Ref Debit Credit 15,000 15,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS account FEBRUARY 19,2016- Pedro purchased Office Supplies from MM Merchandise accounting to PHP5,000 on account. Pedro will pay this on March 30,2016 GENERAL JOURNAL Date Account Title and Explanation Ref 2/19/2016 Supplies Expense Debit Credit 5,000 Accounts Payable 5,000 To record purchase of office supplies on account FEBRUARY 25,2016- Paid the salary of Juana amounting to PHP4,000 GENERAL JOURNAL Date Account Title and Explanation Ref 2/25/2016 Salaries Expense Debit Credit 4,000 Cash 4,000 To record the payment for salary of Juana STEP 3- POSTING The summary (in specialized journals) or individual transactions (in the general journal) are then posted from the journals to the general ledger ( and subsidiary ledgers). Nothing should ever get posted to the ledgers without first being entered in journal. We will now post the previous transactions of Pedro to the general ledger. GENERAL LEDGER Account: Cash Date Item 104 | P a g e Account No: 1000 Ref Debit Credit Balance DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 2/14/2016 Investment of Owner 2/15/16 Purchase of Computer 2/17/16 Repair Income – Jean 2/25/16 Payment of Juana Salary 200,000 200,00 25,000 10,000 175,000 185,000 4,000 181,000 GENERAL LEDGER Account: Accounts Receivable Date Item 2/18/16 Repair Income- Mike Account No: 1200 Ref Debit Credit 15,000 Balance 15,000 GENERAL LEDGER Account: Office Equipment Date Item 2/15/16 Purchase of Computer Account No: 1600 Ref Debit Credit 25,000 Balance 25,000 GENERAL LEDGER Account: Accounts Payable Date Item 2/15/16 Purchase office Supplies Account No: 2000 Ref Debit Credit Balance 5,000 5,000 GENERAL LEDGER Account: Matapang, Capital Date Item 2/15/16 Investment of Owner Account No: 3000 Ref GENERAL LEDGER 105 | P a g e Debit Credit Balance 200,000 200,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Account: Service Revenue Date Account No: 4000 Item Ref Debit Credit Balance 2/17/2016 Repair Income- Jean 10,000 10,000 2/18/2016 Repair Income – Mike 15,000 25,000 GENERAL LEDGER Account: Supplies Expense Date Account No: 6150 Item Ref 2/14/2016 Purchase- Office supplies Debit Credit 5,000 Balance 5,000 GENERAL LEDGER Account: Salaries Expense Date Item 2/2/2016 Payment of Juana’s Salary Account No: 6100 Ref Debit Credit 4,000 Balance 4,000 STEP 4- UNADJUSTED TRIAL BALANCE At the end of an accounting period (for example, one month or one year) the working trial balance is prepared. This involves copying each account name and account balance to a worksheet (working trial balance). The resulting first two columns of the worksheet are called the unadjusted trial balance. In the preparation of the unadjusted trial balance, the balances in all general ledgers at the end of the reporting date are forwarded to the appropriate column. The unadjusted trial balance for the transactions in our example from Step 3 is the following: MATAPANG COMPUTER REPAIRS Unadjusted Trial Balance February 29,2016 Account Title 106 | P a g e Debit Credit DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Balance Sheet Accounts Cash 181,000 Accounts Receivable 15,000 Office Equipment 25,000 Accounts Payable 5,000 Matapang, Capital 200,000 Income Statement Accounts Service Revenue 25,000 Supplies Expense 5,000 Salaries Expense 4,000 230,000 230,000 Notice that all asset accounts are presented first, followed by liabilities, equity (or capital account), income accounts and lastly, expenses accounts. STEP 5- WORKSHEET This step is simply about plotting the items in the unadjusted trial balance on the worksheet. In a manual accounting system, a worksheet is large columnar sheet of paper specifically designed to conveniently arrange all the accounting information required at the end of a period. The worksheet is used to check whether ledger accounts are balances and adjusted. The satisfactory completion of a worksheet provides assurance that all the details of the end of period accounting procedure were properly brought together. The worksheet serves as the source in the preparation of financial statements and other closing and adjusting entries. The body of the worksheet contains five pairs of money columns. A sample of a worksheet is shown below: 107 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS NAME OF THE COMPANY WORKSHEET For the period (Month/year) ended Unadjusted Trial Adjustments ______,20____ Balance DR Statement of Financial Position Accounts Cash Accounts Receivable Inventory Office Equipment Accum Deprn-Off Eqpt Land Intangible Assets Accounts Payable Owner’s, Capital Owner’s Withdrawal Income Statement Accounts Sales 108 | P a g e CR DR CR Adjusted Trial Statement Balance Position Income DR DR CR of Statement of Financial CR DR CR DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Sales Returns and Allowances Sales Discount Interest Income Purchases Purchase Returns and Allowances Purchase Discounts Freight In Salaries Expense Supplies Expense Utilities Expense STEP 6- ADJUSTING ENTRIES At the end of the accounting period, some accounts in the general ledger would require updating. The journal entries that bring the accounts up to date are called adjusting entries. One purpose of adjusting entries is for income and expenses to be reported in the correct period. Adjusting entries ensure that both the revenue recognition and matching principles are followed. REVENUE RECOGNITION – Accounting standards require that revenue is recognized when it is earned and the amount can be measured reliably. To illustrate: 109 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 1 Assume that you are preparing the financial statements for Feb 2016. Matapang Computer Repairs rendered services amounting to PHP25,000 for the repair of the computer units of Feb 26,2016. However, the payment for these services of Matapang will be made on Mar 15,2016. Question: when should you recognize the PHP25,000 as revenue or income, in February or March? Applying the revenue recognition principle, it should be reported as revenue for February 2016. 1 Assume that you are preparing the financial statements for February 2016. On February 28,2016, Matapang Repairs received payment from Mr. Tamad amounting to PHP25,000. This payment is for the repair of the computer units of Mr. Tamad on March 5,2016. 110 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Question: When should you recognize the PHP25,000 as revenue or income, in February or March? Applying the revenue recognition principle, it should also be reported as revenue in March 2016. Take note that since the service will be rendered in March, the revenue should also be earned in March. What about February 2016? The amount is recorded as a liability because Matapang Repairs has the obligation to render this service in the future. Matching Principle – This principle directs a business to report an expense on its income statement within the same period as its related income. To illustrate: 1 Assume that you are preparing the financial statements for February 2016. The business gives a commission of 10% service income to its employees. The commission is paid the following month. On February 2016, the total service income for the month is PHP100,000. Thus, the employees are entitled to commission of PHP10,000. This amount will be paid on March 12,2016. Question: When should the commission expense be recorded in the books of accounts of the business, in March or in February? Applying the matching principle, the answer is in February. Adjusting entries are made at the end of each accounting period. Adjusting entries make it possible to report correct amounts on the statement of financial position and on the income statement. All adjusting entries affect at least one income statement account and one statement of financial position account. Thus, an adjusting entry will always involve an income or expense account and an asset or liability account. There are five basic sources of adjusting entries: 1. Depreciation Expense 2. Deferred expenses or prepaid expenses 3. Deferred Income or unearned income 4. Accrued expenses or accrued liabilities 5. Accrued income or accrued assets. # Depreciation. Depreciation is a method of allocating the cost of an asset to an expense over the accounting periods that make up the asset’s useful life. Examples of assets subject to depreciation are: Store, Office, Building and Transportation equipment. These types of assets lose their ability to provide useful service as time passes. Depreciation can also be referred to as the decrease in the usefulness of 111 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS these types of assets. Take note that Land is not subject to depreciation because the value of land mostly increase as time passes. Exercise on Adjusting Entries to record Depreciation Recall that Matapang acquired office equipment of February 15,2016 for his repair shop business. The cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is estimated that after five years, the office equipment can be sold at a scrap value of PHP1,000. The company uses the straight line method of depreciation. Depreciation is a means of allocating the cost of an asset to an expense over the accounting period that will benefit the use of the asset. In the exercise above, the equipment will be used by Matapang for five years, Proper accounting procedures dictates that the cost of PHP25,000 should be spread over five years. There are several methods or formulas to compute the amount of depreciation. The simplest is the straight line method. The formula is Annual Depreciation: (Acquisition Cost- Salvage or Residual Value)/ Useful life. Applying this formula to the exercise: Annual Depreciation = (25,000-1,0000)/5 = PHP 4,800 If the accounting period being reported by Matapang is for the month ending February 29,2016, the adjusting entry to record this depreciation in the books of Matapang is: GENERAL Journal Date Account Title and Explanation 2/29/16 Depreciation Expense Accumulated Depreciation – Office Eqpt Ref Debit Credit 200 200 The depreciation expense of PHP200 was derived by computing the monthly depreciation of PHP400 112 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS (Annual Depreciation of PHP4,800/12moths) and multiplying the PHP400 by one-half since the equipment was acquired in the middle of February, #2 Deferred Expenses or Prepaid Expenses. These are items that have been initially recorded as assets but are expected to become expenses over time or through the operations of the business. Exercise- Adjusting entries to record deferred expenses or prepaid expenses. These are items that have been initially recorded as assets but are expected to become expenses over time or through the operations of the business. Exercise- Adjusting entries to record deferred expenses or prepaid expenses Recall that on February 19,2016 Matapang purchased PHP5,000 worth of office supplies on account. By the end of the month, PHP2000 worth of these supplies are still unused. The February 19,2016 entry to record the purchase on the account of office supplies was already posted to the general ledger and included in the balances, as shown in the unadjusted trial balance above. The entry was shown only for illustration purposes. GENERAL JOURNAL Date Item Ref 2/19/16 Supplies Expense Debit Credit 5,000 Accounts Payable 5,000 To record the purchased of office supplies on account 2/29/16 Supplies Supplies Expense To set-up the value of unused supplies 113 | P a g e 2,000 2,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS The “Supplies” account debited of February 29,2016 above in an asset account and represents the value of supplies unused as of the end of February 2016. If these journal entries are posted to the general ledger, the following should be the balance of each account: Account Title Debit Supplies Credit 2,000 Accounts Payable 5,000 Supplies 3,000 The alternative entries to record the above transactions are: GENERAL JOURNAL Date Item Ref 2/19/16 Supplies Debit Credit 5,000 Accounts Payable 5,000 To record the purchased of office supplies 2/29/16 Supplies Expense 3,000 Supplies 3,000 To set up the value of unused supplies If the entries are posted in the ledger, the following should be the balances of each account: Account Title Supplies Debit 2,000 Accounts Payable Supplies Expense Credit 5,000 3,000 Notice that even with the different approaches in recording the transactions in the journal entreis, the balances in the general ledger will always be the same whether you used the first approach or the second approach. 114 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS #3 Deferred Income or Unearned Income. These are items that have been initially recorded as liabilities but are expected to become income over time or through the operations of the business. Exercise- Adjusting entries to record deferred or unearned income On February 15,2016 Matapang entered into a contract with Makisig to maintain the computers of Makisig for two months starting on February 15, 2016 up to April 15,2016. On the same date. Makisig paid the total contract amount of Php40,000 in full. The entries to record and adjust the books are: In the February 29,2016 entry above, as of end of February 2016, Matapang has already earned the service revenue for the first 15 days, thus an adjusting entry is recorded. GENERAL JOURNAL Date Item 2/15/16 Cash Ref Debit Credit 40,000 Unearned Service Revenue 40,000 To record receipt of full payment for the two- month service contract with makisig 2/29/16 Unearned Service Revenue Service Revenue 10,000 10,000 To record service income earned from Feb 15-29, 2016; P40,000 x (1/2month/2months) #4 Accrued Expenses or Accrued Liabilities. These are items of expenses that been incurred but have not been recorded and paid. Exercise- Adjusting entries to record Accrued expenses or accrued liabilities. On February 29,2016, Matapang received the electric bill for the month of February amounting to PHP 3,800. Matapang will pay this bill on March 2016. The electric bill represents the cost of electricity used (or incurred) for February. Although the said bill is still unpaid and thus was not recorded, the matching principle and accrual basis of accounting dictates 115 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS that the same should be recorded in February. Otherwise, your expense will be understated and thus the company will be reporting an overstated income (or an erroneous income). Needless to say, erreous information may lead to wrong decisions. The entry to record the accrual of this expense is: GENERAL JOURNAL Date Item Ref 2/29/16 Utilities Expense Debit Credit 3,800 Utilities Payable 3,800 To accrue the cost of electricity incurred for the month of February. #5 Accrued Income or Accrued Assets These are income items that have been earned but have not been recorded and paid by the customer. In short, these are receivables of the business. Exercise – Adjusting entries to record accrued income or accrued assets On February 28,2016, Matapang repaired the computer of Pedro for PHP15,000. Pedro was on an out-oftown trip so he could not pay Matapang. He told Matapang that he will pay for their services in March 1, 2016. Matapang has already earned the PHP15,000 but was not paid as of the end of February 2016. Therefore, an income should be properly recognized in February 2016 for this transaction. The entry to record this is: GENERAL JOURNAL Date Item Ref 2/29/16 Accounts Receivable Service Income To accrue the cost of electricity incurred for the month of February. 116 | P a g e Debit Credit 15,000 15,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 117 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Enter all adjustments to the worksheet Matapang Computer Repairs WORKSHEET For the month ending February 29,2016 Unadjusted Trial Adjustments Balance DR Adjusted Trial Balance Position CR DR CR DR CR BALANCE SHEET ACCOUNTS Cash 221,000 Accounts Receivable 15,000 221,000 Supplies Office Equipment 15,000 30,000 2,000 2,000 25,000 25,000 Accum. Deprn-Off Eqpt 200 Accounts Payable 200 5,000 5,000 Utilities Payable 3,800 Unearned Service Revenue 40,000 Matapang, Capital 200,000 3,800 10,000 30,000 200,000 INCOME STATEMENT ACCOUNTS Service Revenue Supplies Expense 118 | P a g e 25,000 5,000 25,000 2,000 50,000 3,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Salaries Expense 4,000 4,000 Utilities Expense 3,800 3,800 Depreciation Expense 200 200 270,000 270,000 31,000 31,000 289,000 289,000 Note: The entry to record the receipt of PHP40,000 from Makisig on February 15,2016 was reflected in the unadjusted trial balance columns. S STEP 7. Preparation of the Financial Statements. Using the information from the worksheet, the financial statements are prepared. The following are the financial statement 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 ad 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 woner’s interest on the company during the period are reported here. 4. Cash Flow Statement – 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. Based on the worksheet below, the income statement 119 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS of Matapang for February 2016 should appear as follows: 120 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS For the month ending February 29,2016 Unadjusted Trial Income Statement Balance DR CR DR CR BALANCE SHEET ACCOUNTS Cash 221,000 Accounts Receivable 30,000 Supplies 2,000 Office Equipment 25,000 Accum. Deprn-Off Eqpt 200 Accounts Payable 5,000 Utilities Payable 3,800 Unearned Service Revenue 30,000 Matapang, Capital 200,000 INCOME STATEMENT ACCOUNTS Service Revenue 50,000 50,000 Supplies Expense 3,000 3,000 Salaries Expense 4,000 4,000 Utilities Expense 3,800 3,800 Depreciation Expense 200 200 11,000 Net Income 121 | P a g e 50,000 39,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Matapang Computer Repairs Statement of Comprehensive Income For the month ended February 29,2016 SERVICE REVENUE 50,000 LESS:EXPENSES Supplies Expense 3,000 Salaries Expense 4,000 Utilities Expense 3,800 Depreciation Expense 200 Total Expenses 11,000 NET INCOME 39,000 STEP 8- JOURNALIZE THE CLOSING JOURNAL ENTRIES The income, expense, withdrawal (equity) accounts are called temporary accounts or nominal accounts. They are called temporary because they accumulate the transactions of only one accounting period. At the end of this accounting period, the changes in owner’s equity accumulated in these temporary accounts are transferred into the owner’s capital account. This process serves two purposes: (1) to update the balance of the owner’s capital; and (2) it returns the balances continue to exist beyond the current accounting period. Closing the books is the process of transferring the balances of the temporary accounts to the owner’s permanent capital account. The closing journal entries should consist of the following: All of the nominal revenue accounts should be closed to the income summary account by debit to revenue and Credit to income summary. 122 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS All of the nominal expense accounts should be closed to the income summary by Credit to expense and Debit to income summary. The balance in the income summary account should now reflect the net income for the accounting period. 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. 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. 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. To illustrate: GENERAL JOURNAL Date Account title and Explanation 2/29/16 Service Revenue Ref Debit Credit 50,000 Income Summary 50,000 To close nominal revenue Accounts Income Summary 11,000 Supplies Expense 3,000 Salaries Expense 4,000 Utilities Expense 3,800 Depreciation Expense 200 123 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS After the above, the balances for these accounts are: Supplies Salaries Utilities Depreciation Revenue Income Expense Expense Expense Expense Accounts Summary Debit Credit Debit Credit Debit Credit Debit Credit Debit Debit 3,000 3,000 4,000 4,000 3,800 3,800 200 50,000 50,000 11,000 11,000 0 0 0 200 0 Credit 0 Credit 0 Notice that the ending balance of the Income Summary Account amounting to 39,000 credit represents the net income for the period of Matapang. The balance of the Income Summary Account is then closed to the Capital Account by this entry. GENERAL JOURNAL Date Account Title and Explanation Income Summary Matapang, Capital 124 | P a g e Ref Debit Credit 39,000 39,000 DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL UNKNOWN ACCOUNT TO BE DEBITED Instruction: Fill in the missing Account debited to complete the journal entries of Mr. Nelson Palete, owner of Koronadal Refrigeration Services. Jan 3 7 10 13 15 19 23 27 30 ____________________________ N. Palete, Capital Initial cash investment _____________________________ Service Income Rendered Services on account _____________________________ Accounts Payable Various shop supplies on account. _____________________________ Cash on Hand Payment of accounts _____________________________ Cash on Hand Withdrawal of the owner _____________________________ Accounts Receivable Collection of account ____________________________ Notes Payable Issued a note for borrowed money _____________________________ Cash on Hand Payment of Taxes and Licenses _____________________________ Services Income Received a note for services rendered 125 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL JOURNALIZING USING THE TRANSACTIONS ANALYSES WORKSHEET Helen L. Valdez, is engaged in the business of Chairs and Tables rental for all occasions. She needs your assistance in recording her business transactions. Shown hereunder is a chart of accounts for you to use in describing the exchanges of values. Valdez Tables and Chairs Chart of Accounts Assets Income Owner’s Equity Cash in Bank Rental Income H. Valdez, Capital Accounts Receivable H. Valdez, Drawing Tables and Chairs Expenses Salaries Expense Liabilities Rent Expense SSS Premium Payable SSS Contribution Philhealth Premium Payable Philhealth Contribution The completed transactions for the month of December 2007 are as follows: Dec1 She made the following investments: Cash in Bank P75,000 Tables and chairs 150,000 5 Received cash for rental of tables and chairs, P15,000 8 Tables and chairs rental on account, P4,000. 13 Paid space rental for the month, P2,500. 17 She withdrew cash of P20,000 to buy a computer for her personal use. 20 Partial collection of account, P2,000 (refer to transaction of Dec. 8). 30 Paid salaries for the month: Salaries 6,000 Less: Deductions SSS P200 Philhealth 75 275 Net payroll P5,725 Required: 1. Set up accounts in the Transactions Analyses Worksheet, the same accounts listed in the given Chart of Accounts. 2. Enter your analyses in the Transactions Analyses Worksheet showing the details of Valdez, Capital account 3. Record the above transactions in a journal entry form. You may utilize the vacant space of your worksheet. 126 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL JOURNALIZING – CREATING ACCOUNT TITLES Mr. Bonifacio Slava, owner of Commander’s Barber Shop has been operating for a year. His bookkeeper has resigned and he is asking your help to record his transactions for the month of July 2007. His business has no chart of accounts where you can refer the appropriate account titles. July 2 6 8 10 14 16 18 20 26 29 31 31 He made an additional investment of P50,000. Bought talcum powder, lotion, ribbing alcohol, soap, etc., on account, P2,000 (shop Supplies Expense) Paid P500 for laundry expenses. Remitted to SSS, Philhealth and BIR what has been deducted from payroll for the month of June 2005. SSS P1,500.00 Philhealth 375.00 Withholding Tax 750.00 Total cash collection for two weeks (Barber Shop Income), P18,000. Bought new barber’s chair on account P30,000 (Barber Shop Equipment) Paid light and water bills P5,000 (Utilities Expense) Paid the account of July 6. Paid in full the account of July 16. Total Cash collections for 2weeks (Barber Shop Income), P20,500. Paid Salaries and wages for the month. Salaries and Wages P16,500.00 Less: Deductions SSS P583.50 Philhealth 187.50 Withholding Tax 250.00 1,021.00 Net Payroll P15,479.00 Employer’s share: SSS, P936.50 and Philhealth, P187.50. Requirement: Record the transactions using a 2 Column General Journal. Create your own account titles that will appropriately describe the exchanges of values. 127 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL POSTING TO THE LEDGER AND PREPARATION OF A TRIAL BALANCE The following were the journal entries recorded in the General Journal of Mr. Elizardo Sintos, an operator of a transportation business. March 2 3 5 8 10 14 17 18 20 28 29 Cash on Hand Jeepneys (2units) Sintos, Capital Prepaid Insurance Cash on Hand Taxes and Licenses Cash on Hand Repairs and Maintenance Battery Rental Expense Cash on Hand Cash on Hand Rental Income Jeep Supplies Expense Accounts Payable Cash on hand Rental Income Vulcanizing Expense Cash Sintos, Drawing Cash on Hand Cash on Hand Rental Income Accounts Payable Cash On hand P60,000 P450,000 P510,000 P4,500 4,500 3,500 3,500 1,350 400 1,750 4,100 4,100 3,880 3,880 4,800 4,800 120 120 2,000 2,000 4,400 4,400 2,550 2,550 Required: 1. Prepare T-account for each of the following: Cash on Hand; Prepaid Insurance; Jeepneys; Accounts Payable; Sintos, Capital; Sintos, Drawing; Rental Income; Battery Rental Expense; Jeepney Supplies Expense; Vulcanizing Expense and Taxes and Licenses. 2. Foot the T-Accounts 3. Prepare a Trial Balance. 128 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL JOURNALIZING BASED ON THE GIVEN CHART OF ACCOUNTS Helen Grace Ferrer, CPA has P170,000 to start with in her public practice. She has completed her transactions for the month of February 2007. The following chart of accounts are given below: Helen Grace Ferrer, CPA Chart of Accounts Assets Owner’s Equity Cash on Hand H. Ferrer, Capital Cash in Bank H. Ferrer, Drawing Accounts Receivable Office Equipment Income Professional Fees Income Liabilities Expenses Accounts Payable Salaries and Wages Unearned Professional Income Taxes and Licenses SSS Premium Payable Supplies Expense Philihealth Premium Payable Rent Expense Withholding Tax Payable SSS Contribution Philhealth Contribution Feb. 1, 2020 She opened a bank account and deposited P100,000. The P70,000 will be used as resolving fund. (Initial Investment) 2 Paid business permit and other fees, P1,,350.00 3 Bought various stationeries and supplies, P1,000 5 Bought a steel cabinet on account, P31,000. 15 Received P15,000 from a client for professional services rendered. 20 Made partial payment of December 5 account, P8,000. 21 Deposited to the bank, P5,000 (from cash on hand). 23 Paid office rental, P2,000. 25 Deposited to the bank, Cash received from a client for professional service rendered, P5,000 (outright deposit) 26 Withdrew P4,000 from bank deposits for her personal use. 28 Paid salaries for the month. Salaries 12,000 Less: Deductions SSS P466.80 Philhealth 200.00 Withholding Tax 195.00 861.80 Net Payroll P11,138.20 28 Employer’s share: SSS, P749.20 and Philhealth, P200. 29 Received cash in advance for the professional services to be rendered in March, P8,000. 129 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL JOURNALIZING AND POSTING Aida Ricarte, owner of Tacloban Beauty Salon has requested your assistance to do and prepare for the following: a. Recording of the transactions in the 2-column journal. b. Posting the journal entries to the T-accounts or General Ledger (Use the Page no. of the account found on the chart). Page No. 1 Cash in Bank 3 Accounts Receivable 5 Shop Supplies Inventory 6 Furniture and Fixtures 8 Shop Equipment 11 Accounts Payable Transactions for the month of October: Page No. 14 Ricarte, capital 15 Ricarte, Drawing 16 Services Rendered 17 Taxes and Licenses 20 Rental Expense 22 Commission Expense 1. She made the following investments: Cash P150,000 Furniture and Fixtures 25,000 Shop Equipment 35,000 2. Paid business permits and licenses, P2,050.00 9 Bought some beauty products and supplies on account, P15,000. 14 Revenue for the week: Cash P5,000 On account 6,000 15 Partial payment of October 9 account, P9,000. 21 Revenue for the week, P10,000. 25 Payment of rental for the month, P5,000 27 Revenue for the week: Cash P4,000 On account P7,000 28 Withdrew cash from the business for personal use, P3,000 30 Paid commission to beautician, P11,000 130 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Posting Entries Directly to a T-Account and Preparation of a Trial Balance Instruction: Set up seven (6) accounts in T form for each of the following: Cash on Hand, Accounts Receivable, Photographic Supplies Inventory, Photographic Equipment. Accounts Payable and Sylvia Gondales, Capital (for Drawing, Income and Expense). June 1 June 3 5 8 10 13 17 20 23 27 30 the owner, Sylvia Gondales invest P80,000 cash and Photographic Equipment worth P50,000. Rendered photographic services on account, P10,000. Purchased photographic supplies on account, P15,000. Collected P8,000 cash from a customers’ account. Paid light and water (Utilities Expense), P5,000. Withdrew P5,000 cash from the business for personal use. Rendered photographic services for cash, P15,000. Paid P6,000 cash on the June 5 account. Paid rental fee for the month, P3,000. Withdrew another P2,000 cash from the business for personal use. Paid salaries to employees, P8,000. Requirements: 1. Enter the above transactions in T account you prepared. 2. Foot the account balance. 3. Prepare a trial balance. 131 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Preparation of Adjusting Journal Entry From the given partial trial balance, prepare adjusting journal entries at the end of the year: Ma. Cristina Pascua-Obeso, CPA Partial Trial Balance December 31, 2020 Cash Accounts Receivable Furniture and Fixtures Accounts Payable Obeso, Capital Salaries Expense P 53,000 85,000 35,000 P 27,000 165,000 75,000 1. Cash collected from a customer’s account in the amount of P10,000 was not recorded in the book. This is covered by Official Receipt No. 0521 Dated December 31, 2020 Debit, ________________ and Credit _____________________. 2. Payment of account to a supplier in the amount of P15,000 was not recorded. This is covered by Check No. 00751 as per check stub on file. Debit ________________ and Credit ______________________ 3. Cash withdrawal of the owner amounting to 5,000 was erroneously charged to Salaries Expense. Debit ________________ and Credit ______________________ 4. Furniture and fixtures was acquired on March 31,2020 with an estimated life of 5 years with a residual value of P5,000 at the end of its life. Debit ________________ and Credit ______________________ 5. Provision for doubtful accounts is estimated to be at 1.5% of the Accounts Receivable. Debit ________________ and Credit ______________________ 132 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL Adjustments to Adjusted Trial Balance Account Titles Richard Belarmino Preliminary Trial Balance December 31,2020 Trial Balance Adjustments Debit Cash in Bank 75,000 Accounts Receivable 65,000 Allow. For Bad Debts Credit Debit Credit Adjusted Trial Balance Debit Credit 500 Supplies Inventory 15,000 Office Equipment 60,000 Acc. Dep’n Office Equipment Accounts Payable 10,000 Accrued Salaries Expense Belarmino, Capital 143,500 Service Income 85,000 Bad debts Depreciation Expense Salaries Expense 24,000 Supplies Used TOTAL 239,000 239,000 The following omissions were discovered in the course of your examination: 1 Cash received from a customer for services rendered was not recorded in the book. This is covered by Cash Sales Invoice #0132 dated December 31, 2020, P5,000. 2 Allowance for doubtful accounts should be adjusted to equal to 1% of the outstanding accounts receivable. 133 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS 3 Office Equipment was acquired on July 1, 2007 with an estimated life of 5years without scrap value. 4 5. Payment to a supplier’s account in the amount of P10, 000 was inadvertently omitted. This is covered by Check Voucher #018 dated December 31, 2020. Supplies that were actually on hand when physical counting was made, P8,000. 6 Unpaid salaries as of December 31, 2020, P3,000. Required: Prepare an adjusted trial balance. (use letter-sequencing in your adjusting entry) 134 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS STUDENT’S NAME: ____________________________________ COURSE AND YEAR: _____________ CLASS SCHEDULE: INSTRUCTOR: REX T. PASQUIL PREPARATION OF A WORKSHEET AND FINANCIAL STATEMENTS Queen City Videotape Preliminary Trial Balance December 31,2020 Account Titles Debit Credit Cash in Bank P 125,000 Accounts Receivable 30,000 Allow. For Bad Debts Unused Supplies 10,000 Videotape Inventory 105,000 Furniture and Fixture 80,000 Acc. Depreciation Note Payable 50,000 Accounts Payable 35,000 Accrued Interest Edgar Detoya, Capital 162,000 Edgar Detoya, Drawing Rental Income 180,000 Other income 18,000 Bad Debts Depreciation Expense Interest Expense Damaged Videotape Supplies Videotape Salaries Expense 95,000 _______ Total P 445,000 P445,000 The following errors and omissions were discovered at year-end prior to closing of the books. a. Bad debts should be provided at 1%of the outstanding receivable balance. b. Actual cost of supplies used amounted to P6,000. c. Physical inventory conducted on December 31, 2020 were found to have P15,000 cost of videotapes to have been damaged. d. Furniture was acquired on October 1, 2020 with an estimated life of 5years and with a scrap value of P5,000 at the end of its life. e. Owner’s withdrawal was erroneously charged to salaries expense, P20,000. f. Interest on Notes Payable has been accrued, P4,000 g. Payment for the purchase of videotapes on account was not recorded, P15,000. 135 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS Required: 1. Separate Adjusting Journal Entries 2. An 8-column worksheet. 3. An Income Statement for the year ended 31 December 2020 4. A statement of charges in owners Equity for the Year ended December 31 2020. 5. A Balance Sheet as of December 31,2020 136 | P a g e DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE AND TECHNOLOGY JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS FUNDAMENTALS OF ACCOUNTING BUSINESS AND MANAGEMENT Compiled by: REX T. PASQUIL Instructor 137 | P a g e