LECTURE NOTES:
STEPS IN THE ACCOUNTING PROCESS (CYCLE)
1.
2.
3.
4.
5.
6.
7
8.
9.
Analy ze busine ss d ocume nt s
Journalize transactions
Post to ledger accounts
Prepare a trial balance
Prepare adjusting entries
Prepare financial statements (using a work sheet or
from the adjusted individual accounts)
Close the nominal accounts
Pr ep are a p o st - c lo s ing tr ia l b a lan c e ( opt io na l)
Prepare reversing entries (optional)
4. The trial balance of Mistake Company shown below
does not balance. Your review of the ledger reveals
the following: (a) Each account had a normal balance.
(b) The debit footings in Prepaid Insurance, Accounts
P a y a b le , a n d P r o p e r t y T a x E x p e n s e w e r e e a c h
understated by P100. (c) A transposition error was
made in Accounts Receivable; the correct balances for
Accounts Receivable and Service Revenue are P2,750
a n d P 6 , 6 9 0 , r e s p e c t iv e ly . ( d ) A D e b it p o s t in g t o
Adv ert is ing Ex pe n se o f P3 0 0 w a s om itt ed, (e) A
P1,500 cash drawing by the owner was debited to
Mistake Capital, and credited to Cash.
Mistake Company
Trial Balance
December 31
The accounting process can be described as a set of
procedures used in identifying, recording, classifying, and
interpreting information related to the transactions and
other events of a business enterprise.
1. Comparison of the balance sheet of OUTREACH at the
end of 2019 with its balance sheet at the end of 2015
showed a decrease in total assets of P69,000 and
owners' equity by P15,000. The change in liabilities
during the year was
a. Increase of P84,000
c. Decrease of P54,000
b . D e c r e a s e of P 8 4 , 0 0 0 d. Increase of P54,000
2. Tung Company had total assets of P20,000,000 and
shareholders' equity of P15,000,000 on January 1.
During the year, assets increased by P3,000,000 and
liabilities decreased by P1,000,000. Tung Company
should report what amount of shareholders' equity on
December 31?
a. P18,000,000
c. P19,000,000
b.
P17,000,000
d. P16,000,000
3. The following transactions and events relate to Booty
Company for the current accounting period.
a) S old me r cha n d ise cost ing P 450, 000 for
P100,000 cash and P700,000 on open account. A
perpetual inventory system is used.
b) Pur ch as ed land f or P 1, 00 0, 00 0 ca sh a nd a
P3,000,000 mortgage.
c) Received payment on account, P120,000.
d) Estimated that utilities expense for the _coming
six months will total P80,000.
e) Declared a cash dividend totaling P100,000.
The dividend will be paid in six weeks.
The foregoing transactions and events increased
a. Total assets by P4,920,000
b. Total liabilities by P3,000,000
c. Total equity by P700,000
d. Net Assets by P250,000
Debit
Cash
Accounts Receivable
Prepaid Insurance
Equipment
Accounts Payable
Property Tax Payable
Mistake, Capital
Service Revenue
Salaries Expense
Advertising Expense
Property Tax Expense
Credit
P4,800
2,570
700
P-8,000
4,500
560
11,200
6,960
4,200
1,100
880
P20,890
24,500
The corrected trial balance of the company should
show total debits of
a. P24, 350
c. P 2 2, 8 5 0
b. P23, 070
d. P 2 1, 5 7 0
Use the following information for the next two questions.
For each situation, reconstruct the adjusting entry that
was made to arrive at the ending balance. Assume that
the entity prepares statements and adjusting entries only
once each year.
5. Prepaid Insurance:
Balance beginning of year
Balance end of year
5,600
6,400
During the year, an additional business insurance
policy was purchased. A 2-year premium of P2,500
was paid and charged to Prepaid Insurance.
a.
b.
c.
d.
Deb it I ns u ra n ce Exp en s e a nd cr ed it Pr ep a id
Insurance, P1,700.
Debit Prepaid Insurance and credit Insurance
Expense, P1,700.
Debit Prepaid Insurance and credit Insurance
Expense, P800.
Debit Prepaid Insurance and credit Insurance
Expense, P6,400,
6. Unearned Rent:
Balance beginning of year
Balance end of year
P11,000
15,000
SUGGESTED ANSWER
1.
2.
3.
4.
5.
C
C
D
A
A
Ware ho use q uart er ly ren t r ece ive d in adva nc e is
P18,000. During the year, equipment was rented to
another company at an annual rent of P9,000. The
quarterly rent payments were credited to Re nt
Income; the annual equipment rental was credited to
Unearned Rent.
a.
b.
c.
d.
Debit Rent Income and credit Unearned Rent,
P4,000
Debit Unearned Rent and credit Rent Income,
P4,000
Debit Rent Income and credit Unearned Rent,
P5,000
Debit Unearned Rent and credit Rent Income,
P5,000
3.
P r e p aid e xp e n se s — r e c or d ed c a s h p a y me n t s f o r
benefits not yet received or only partially so.
4.
Unearned income—recorded cash receipts for services
to be rendered in the future or only partially rendered
at the balance sheet date.
5.
Asset depreciation —a systematic allocation of an
asset's cost to expense and a reduction, using a contra
(or offset) account, in carrying value for a period
during which the asset is used in operations.
6.
Doubtful accounts—estimated amount of uncollectible
accounts receivable charged to current period's income
as bad debt expense.
7.
LECTURE NOTES:
Adj u st ing th e in ve nt or y a c co u n t.
a.
Periodic system. Under the "adjusting method,"
Debit/credit Inventory for the increase/decrease
from t he beg inn ing of the per iod, t hen make
appropriate entries to transfer the balances in
Purchases and related accounts to Cost of Goods
Sold.
b.
Perpet ual syst em. No adj ust me nt is neede d,
except for unrecorded spoilage, theft losses, or
other "shrinkage" (as evidenced by a difference in
the balance of the inventory account with the
appropriate balance as determined according to a
"physical" inventory).
Adjusting entries
All relevant information that has not been recorded must
be determined, recorded, and posted so that accounts are
updated prior to preparing financial statements.
Typical items for adjustment:
1.
Accrued expenses—expenses incurred, but not to be paid
until a following period.
2.
Accrued income—income earned, but not to be
received in cash until a following period.
Summary of the typical adjusting entries and the effect or pro ft, assets, liabilities and equity of the failure to prepare t he
necessary adjusting entry:
Effect on
Assets
Liabilities
Under
NE
Equity
Over
Under
Under
NE
Under
Under
Under
NE
Under
Over
Over
NE
Over
Income
xx
Unearned income
xx
Over
NE
Under
Over
Unearned income
(liability method)
Unearned income
Income
xx
Under
NE
Over
Under
D e p r e c ia t io n
Depreciation expense
xx
Over
Over
NE
Over
Over
Over
NE
Over
Nature of adjustment
1. Ac c ru ed e xpe n se
Adjusting journal entry
Expense
xx
Payable
xx
2.
xx
Prepaid expense
(expense method)
Receivable
Income
Prepaid expense
Expense
Prepaid expense
(asset method)
Expense
Prepaid expense
xx
5.
Unearned income
(income method)
6.
7.
3.
4.
Ac c ru ed inc o me
xx
xx
xx
xx
xx
Accumulated Dep.
8.
Doubtful accounts
xx _
Doubtful accounts exp. xx
Allow. For D/A
xx
7. The accountant of Review Company made the following
adjusting entry on December 31.
Prepaid Rent
Rent Expense
P1,800
P1,800
If annual rent is paid in advance every October 1, the
original transaction entry made was
a. Debit Prepaid Rent and credit Cash, P1,800.
b. Debit Rent Expense and credit Cash, P1,800.
c. Debit Rent Expense and credit Cash, P2,400.
d. Debit Rent Expense and credit Cash, P7,200.
8. The accountant of Mutya Company made the following
adjusting entry on December 31.
Rent Income
Unearned Rent Income
Profit
Over
P 900
P 900
If annual rent is received in advance every March 1.
the original transaction entry made was
a. Debit Cash and credit Unearned Rent Income,
P900.
b. Debit Cash and credit Rent Income, P1,080.
c. Debit Cash and credit Rent Income, P5,400.
d. Debit Rent Income and credit Cash, P5,400.
9. Caddis Co. had these unadjusted account balances on
December 31:
Inventory, January 1
Purchases
Freight-In
Purchase Discounts
Purchase Returns
P188,250
142,700
12,880
2,140
26,710
SUGGESTED ANSWER
6. D
7. C
8. C
P2,400
Assuming that the ending inventory is P97,900, the
entry to adjust the inventory accounts would include
a. A de b it t o I nve nt o ry o f P 90 ,3 5 0.
b. A debit to Cost of Goods S old of P 217,080.
c. A cred it to Purc hase Disc ounts o f P 2,14 0.
d. A credit to Purchases Returns of P2 6,710.
d.
Cash
Interest Income
P2,400
LECTURE NOTES:
Reversing entries
Interest Income
10, A company receives interest on a P30,000, 8%, 5-year
note receivable each April 1. At December 31, 2019,
the proper adjusting entry was made to accrue interest
receivable. Assuming that the company does not use
reversing entries, what entry should be made on April
1, 2020 when the annual interest payment is received?
P 600
a. Cash
P 600
Interest Income
b.
Cash
Interest Receivable
c.
Cash
Interest Receivable
Interest Income
A reversing entry is made at the beginning of the next
a c c o u n t in g p e r io d a n d is t h e e x a c t o p p o s it e o f t h e
adjusting entry made in the previous period,
The




entries subject to reversal are:
A c c r u a l o f in c o m e
Accrual of expense
Pr ep ay me nt ( u s ing ex pe n se me th o d ), an d
Unearned inc ome (us ing in co me met hod).
P1,800
P1,800
P2,400
P1,800
600
DRILL
1. The beginning-of-the-year total equity for a firm was
P40,000. During the year, the firm issued ordinary
shares for a total proceeds of P20,000, earned P20,000
net in come, and pa id P 5,00 0 in cash div idends . If
ending total liabilities are P100,000, what is ending
total assets?
a. P165,000
c. P1 75,0 00
b P 45,000
d. P 1 0 0, 0 00
2. Moon Company purchased equipment on November 1,
2019, by giving its supplier a 12-month, 9 percent
note with a face value of P48,000. The December 31,
2019, adjusting entry is
a.
debit Interest Expense and credit Cash, P720.
b. debit Interest Expense and credit Interest
Payable, P720.
c.
debit Interest Expense and credit Interest
Payable, P1,080.
d. debit Interest Expense and credit Interest
Payable, P4,320.
3. Rice Corporation loaned
P60, 000 to a nother
corporation on December 1, 2019 and received a '3month, 8% interest-bearing note with a face value of
P60,000. What adjusting entry should Rice make on
December 31, 2019?
a. Debit Interest Re ceivab le and credit I nterest
Income, P1,200.
b. Debit Cash and credit Interest Income, P400.
c. Debit Interest Re ceivab le and credit I nterest
Income, P400.
d. Debit Cash and credit Interest Receivable: P1,200.
4, Gehrig Corporation renewed an insurance policy for 3
years beginning July 1, 2019 and recorded the P81,000
p r e m i u m i n t h e p r e p a id in s u r a n c e a c c o u n t . T h e
P81,000 premium represents an increase of P23,400
fro m t he P 5 7,6 0 0 pre m iu m c har ged 3 yea rs a go.
Assuming Gehrig's records its insurance adjustments
only at the end of the calendar year, the adjusting
entry required to reflect the proper balances in the
insurance accounts at December 31, 2019, Gehrig's
year-end is to
a. Debit insurance expense for P13,500 and credit
prepaid insurance for P13,500.
'b. Debit prepaid insurance for P13,500 and credit
insurance expense for P13,500
DRILL
c . Debit insur ance expense for P6 7,50 0 a nd c redit
prepaid insurance for P67,500.
d. Debit insurance expense for P23,100 and credit
prepaid insurance for P23,100.
5. Daguioman Company received P9,600 on April 1, 2019
f o r o n e ye a r ' s re n t in ad v a n ce a n d r e c o rd ed th e
transaction with a credit to a nominal account. The
December 31, 2019 adjusting entry is
a. de bit Re nt I nc o me and cred it Un ear ned R ent,
P2,400.
b . d e b it R e n t I n c o m e a n d c r e d it U n e a r n e d R e n t ,
P7, 200.
r , a e b it U n e a r n e d R e n t a n d c r e d it R e n t I n c o m e ,
P2,400.
d . de b it U n ea r n ed R e n t a n d c re d it Re n t I n c o m e,
P7,200.
6. Dunlap Company sublet a portion of its warehouse for
5-years at an annual rental of P15,000, beginning on
March 1. The tenant paid 1 year's rent in advance,
which Dunlap recorded as a credit to unearned rental
income. Dunlap reports on a calendar-year basis. The
adjustment on December 31, of the first year should
be
a.
No entry.
b.
Unearned rental income
P2,500
Rental income
P2,500
c.
Rental income
P2,500
Unearned rental income
P2, 500
d.
Unearned rental income
P12,500
Rental income
P12,500
7. A 3-year insurance policy was purchased on October 1
f o r P 6 , 0 0 0 , a n d p r e p a id in s u r a n c e w a s d e b it e d .
As s u m in g a De ce mb er 3 1, ye ar -e nd , w ha t is t he
reversing entry at the beginning of the next period?
a.
None is required.
b.
Prepaid insurance
P5,500
Prepaid insurance
P5,500
c.
Prepaid insurance
P500
Insurance expense
P500
d.
Insurance expense
P500
Prepaid insurance
P500
SUGGESTED ANSWER
9. B
10. C
DRILL
1.
2.
3.
4.
5.
6.
7.
C
B
C
D
A
D
A
1.
Which among the following is the last step in the accounting cycle?
A. Preparation of reversing entries
B. Preparation of financial statements
C. Journalizing and posting of closing entries
D. Preparation of the post-closing trial balance
2.
Arrange the following steps in their correct order:
I. Financial statements are prepared.
II. Adjusting entries are recorded.
III. Nominal accounts are closed.
A.
I, II and III
B. II, I and III
C. III, II and I
D. II, III, I
3.
Adjusting entries are needed because an entity
A. Uses the accrual basis of accounting
B. Has earned revenue during the period by selling products from its central operations
C. Has expenses
D. Uses the cash basis of accounting rather than the accrual basis
4.
Adjusting entries involve
A. Only real accounts
B. Only nominal accounts
C. Only capital accounts
D. At least one real and one nominal account
5.
Which of the following least resembles a typical adjusting entry?
A. Debit asset, credit revenue
C. Debit revenue, credit liability
B. Debit expense, credit liability
D. Debit asset, credit liability
6.
Accruals are
A. Adjusting entries where cash flow precedes revenue or expense recognition
B. Adjusting entries where revenue or expense recognition precedes cash flow
C. Adjusting entries where cash flow and revenue or expense recognition are
simultaneous
D. Adjusting entries where revenue or expenses are recognized in the absence of cash
flow evidence
7.
Which of the following is an example of an adjusting entry?
A. Recording the purchase of supplies on account
B. Recording depreciation of a truck
C. Recording the billing of customers for services rendered
D. Recording the payment of wages to employees
8.
An unearned revenue can be best be described as an amount
A. Collected and currently matched with expense
B. Collected and not currently matched with expense
C. Not collected and currently matched with expense
D. Not collected and not currently matched with expense
9.
Total net income over the life of an entity is
A. Higher under the cash basis than under the accrual basis
B. Lower under the cash basis than under the accrual basis
C. The same under the cash basis as under the accrual basis
D. Not susceptible to measurement
10.
Closing entries
A. Are optional
B. Affect only the real accounts
C. Permit an entity to analyze routine and repetitive transactions the same way all the
time
D. Remove the balances from the entity’s temporary accounts
11.
After the accounts have been closed
A. All the accounts have zero balances
B. The asset, liability, and stockholder’s equity accounts have zero balances
C. The revenue, expenses, income summary, and retained earnings have zero balances
D. The revenue, expenses, and income summary accounts have zero balances
12.
Income summary is a
A. Mixed account
B. Nominal account C. Capital account
D. Real account
13.
The manufacturing summary account
A. Summarizes all revenues and expenses
B. Is a substitute for the income summary
C. Summarizes all accounts that enter into the computation of cost of goods
manufactured
D. Summarizes all accounts that enter into the computation of cost of goods sold
14.
Reversing entries apply to
A. All adjusting entries
B. All deferrals
C. All accruals
D. All closing
entries
15.
Adjusting entries that are reversed include those for prepaid or unearned items that
A. Create an asset or a liability account
B. Were originally entered in a revenue or expense account
C. Were originally entered in an asset or liability account
D. Create an asset or a liability account and were originally entered in a revenue or
expense account
16.
An entity initially records prepayment in real accounts and makes reversing entries when
appropriate. Which of the following year-end adjusting entries should be reversed?
A. The entry to record depreciation expense for the period
B. The entry to record the portion of service fees received in advance that is earned by
year-end
C. The entry to record supplies used during the period
D. The entry to record service fees earned by year-end but not billed
17.
An entity initially records prepayment in nominal accounts. Which of the following yearend adjusting entries may be reversed?
A. The entry to record inventory at year-end
B. The entry to record the portion of rental received in advance that is unearned at
year-end
C. The entry to record the portion of supplies previously acquired that is consumed as of
year-end
D. The entry to record the portion of interest paid in advance that expired at year-end
18.
Which of the following is not true of a worksheet?
A. The worksheet is included as part of the published financial statements
B. The worksheet provides a place where adjusting entries can be made informally
before they are journalized and posted
C. The worksheet provides a balancing mechanism that helps to uncover accounting
errors
D. The worksheet helps facilitate the preparation of financial statements
19.
In preparing a 10-column worksheet
A. The beginning inventory is extended as a credit in the income statement columns
B. The beginning inventory is extended as a credit in the statement of financial position
columns
C. The ending inventory is extended as a debit in the income statement columns and as a
credit in the statement of financial position columns
D. The ending inventory is extended as a credit in the income statement columns and as
a debit in the statement of financial position columns
20.
The balancing figure in the worksheet is net loss of
A. The total of the credits exceeds the total debits in the income statement columns
B. In the statement of financial position columns, the total of the debits exceeds the total
of the credits
C. The total of the credits is the same as the total of the debits in the income statement
columns
D. In the statement of financial position columns, the total of the credits exceeds the total
of the debits
21.
In preparing a worksheet and the entity is profitable in the current period, the total of the
statement of financial position credit column will be
A. Larger than the total of the statement of financial position debit column
B. Smaller than the total of the statement of financial position debit column
C. Larger than the total of the income statement debit column
D. Larger than the total of the income statement credit column
22.
Which of the following is a “source document” and which source document requires an
entity in the books?
A. Chart of accounts B. General Journal C. Purchase order
D. Sales invoice
23.
Which among the rules on debit and credit below is not correct?
A. The normal balance of any account appears on the side for recording increases.
B. Assets and expenses are debited when increased, and liabilities, revenues and equity
are credited when increased.
C. The debit is always on the left side of the accounting double entry.
D. Debit means increase, and credit means decrease.
24.
Debits
A. Increase assets and decrease expenses, liabilities, revenue, and equity
B. Increase assets and expenses and decrease liabilities, revenue and equity
C. Increase assets and equity and decrease liabilities, expenses and revenue
D. Decrease assets and expenses and increase liabilities, revenue and equity
25.
Which of the choices that follow is not a “book of original entry”?
A. Sales journal
B. Voucher register C. General Journal D. General ledger
26.
Journalizing is performed in what phase of the accounting process?
A. Reporting
B. Recording
C. Classifying
D. Summarizing
27.
General ledger serves what phase of the accounting process?
A. Reporting
B. Recording
C. Classifying
D. Summarizing
28.
An accounting record into which the essential facts and figures in connection with all
transactions are initially recorded and in chronological order is called
A. Account
B. Trial balance
C. Ledger
D. Journal
29.
Which of the following accounting tool exemplifies the ledger?
A. T-account
B. General journal C. Trial balance
D. Voucher
It helps localize accounting errors within a period of time.
A. Account
B. Trial balance
C. Ledger
D. Journal
30.
31.
Which statement about the trial balance is incorrect?
A. A trial balance determines the equality between the total debits and credits.
B. A trial balance lists all open accounts in the general ledger as of a time period.
C. A trial balance proves that all amounts have been posted to the correct amounts.
D. A trial balance is required in the accounting process.
32.
It measure economic flow over a period of time
A. Real account
B. Nominal account
C. Mixed account
D. Contra account
33.
An example of a nominal and a contra account is
A. Sales return
B. Allowance for bad debts
C. Freight-out
D. Freight-in
34.
Premium in bonds payable is an example of
A. Nominal and adjunct account
B. Real and adjunct account
C. Nominal and contra account
D. Real and contra account
35.
Which is not correct on the use of special journals?
A. Merchandise sales on account are recorded in the sales journal. Merchandise cash
sales are recorded in the cash receipts journal.
B. Merchandise and other purchases are recorded in the purchases journal. All cash
outlays are recorded in the cash disbursements journal.
C. Transactions that cannot be appropriately recorded in a special journal are recorded in
the general journal.
D. Only cash purchases are recorded in the cash disbursements journal.
Suggested answers
1. D
2. B
3. A
4. D
5. D
6. B
7. B
8. B
9. C
10. D
11. D
12. B
13. C
14. C
15. D
16. D
17. B
18. A
19. D
20. D
21. B
22. D
23. D
24. B
25. D
26. B
27. C
28. D
29. A
30. B
31. C
32. B
33. A
34. B
35. D