Review of the Accounting Process
Debit (DR) – from the Latin word “debere” meaning to owe something
Credit (CR) – from the Latin word “credete” meaning to believe or entrust
By itself
 Debit means nothing more than the left side
 Credit means nothing more than the right side
Debits and Credits
◦ Debit
- Increases assets and expenses.
- Decreases liabilities and revenues.
◦ Credit
- Increases liabilities and revenues.
- Decreases assets and expenses.
The Accounting Universe
Significance depends on
account
5 Basic Elements of Financial Statements
Balance Sheet – Assets, Liabilities, and Equity at a point in time. i.e., Permanent Accounts.
 Assets – Probable future economic benefits obtained or controlled by a particular entity as a result
of past transactions.
 Liability – Probable future sacrifice of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in the future as a result of
past transactions or events.
 Equity – The residual interest in the assets of an entity that remains after deducting liabilities.
Income Statement – Revenues and Expenses for a period of time. i.e., Temporary Accounts.
 Revenue – Inflows or other enhancements of assets or settlement of liabilities from rendering or
producing goods, rendering of services, or other activities that constitute the entity’s ongoing
major, central operations.
 Expenses – Outflows or other using up of assets or incurrences of liabilities during a period from
delivering or producing goods, rendering services, or other activities that constitute the entity’s
ongoing major or central operations.
The Accounting Equation
Movements in Equity Pertains to contributions from and distributions to owners as well as
accumulated profits or losses.
THE ACCOUNTING CYCLE
The accounting cycle represents the steps or procedures used in recording transactions and preparing
financial statements. The accounting cycle implements the accounting process.
STEPS IN ACCOUNTING CYCLE
1.
Analyzing the business documents or transactions.
2.
Journalizing
3.
Posting
4.
Preparing the unadjusted trial balance
5.
Preparing the adjusting entries
6.
Preparing the Adjusted Trial Balance
7.
Preparing the financial statements
8.
Preparing the closing entries
9.
Preparing a post-closing trial balance
10. Preparing the reversing entries
Actually, the accounting process can be classified into two parts, namely recording phase and
summarizing phase. Steps 1 to 4 are within the recording phase while Steps 5 to 10 are within the
summarizing phase.
NOTE: The unadjusted and post-closing trial balance, reversing entries and worksheet are
optional steps in the accounting cycle.
ACCOUNTING RECORDS
On this topic we will discuss the different records used in the accounting cycle and simultaneously
correlate them on which step of the cycle they are used.
Accounting records are either:
1)
Business or source documents - These pertain to the original source materials evidencing a
transaction. Examples are sales invoices, purchase invoices, official receipts, debit and credit
memorandum, check stubs and minutes book. These accounting records are used for STEP 1:
Analyzing the business documents or transactions.
2)
Books of original entry - These pertain to the journals. Aside from the general journal, large
entities maintain special journals such as sales journal, purchases journal, cash receipts journal
and cash disbursements journal. These accounting records are used for STEP 2: Journalizing
3)
Books of final entry - These are the ledgers - general ledger and subsidiary ledgers. These
accounting records are used for STEP 3: Posting
JOURNALIZING
Journalizing is the process of recording transactions in the journal through journal entries.
SYSTEMS OF RECORDING TRANSACTIONS

DOUBLE ENTRY SYSTEM – Under this system, each transaction is recorded in two parts – DEBIT
and CREDIT. This system uses the concepts of DUALITY and EQUILIBRIUM.

SINGLE ENTRY SYSTEM – Under this system, each transaction is recorded through simple
narrative.
Double Entry System
Single Entry System
Approach in computing net
Transactional Approach
Capital Maintenance Approach
income
Complete Accounts (Assets,
Limited Accounts (Cash,
Accounts used for bookkeeping
liabilities, equity, income and
Accounts Receivable, Accounts
expense)
Payable, Equity
Journals, Special Journals,
Cash Books and Subsidiary
Books of accounts used
Ledger, Subsidiary Ledgers and
Ledgers (for personal accounts)
other important books
TYPES OF JOURNAL

GENERAL JOURNAL – A journal used to record transactions not recorded in the special journals.

SPECIAL JOURNALS – Journals used to record transactions of similar nature to facilitate efficient
recording of large number of similar transactions.
o
SALES JOURNAL - Only sales of merchandise on credit are recorded.
o
CASH RECEIPTS JOURNAL - Receipts of cash from any source are recorded.
o
PURCHASES JOURNAL - As a rule, purchases of merchandise on credit are recorded.
o
CASH DISBURSEMENT JOURNAL - All payments of cash for any purpose are recorded.
NOTE: Adjusting entries, closing entries and reversing entries are recorded in the general journal.
POSTING
It is the process of transferring data from the journal to the appropriate accounts in the ledger. Simply
stated, the LEDGER is a systematic compilation of a group of accounts.
KINDS OF LEDGER

GENERAL LEDGER – Contains all the accounts appearing in the trial balance.

SUBSIDIARY LEDGER – This is the device used in storing the details of certain general ledger
accounts. In other words, The general ledger accounts are actually the controlling or main
accounts supported by the details in the subsidiary ledgers.
NOTE: Not all accounts in the general ledger are controlling accounts. The usual control accounts are
AR and AP.
ACCOUNTS
Account is the basic storage of information in accounting. Accounts in the ledger following the TACCOUNT FORMAT, wherein the LEFT SIDE is known as the DEBIT SIDE while the RIGHT SIDE is
known as the CREDIT SIDE.
The accounts used by a particular entity are usually expressed in the form of chart of accounts. A
chart of accounts is a listing of all the entity's general ledger accounts in a systematic form.
Accounts are classified as:

REAL ACCOUNTS - represent assets, liabilities and equity. These are also known as permanent
accounts because they are carried from one accounting period to another.

NOMINAL ACCOUNTS - represent revenues and expenses. These are also known as temporary
accounts because they are closed at the end of every accounting period.

MIXED ACCOUNTS - represent those with real and nominal element.

CONTRA ACCOUNTS – are accounts that are deducted from a related account such as
accumulated depreciation and allowance for doubtful accounts.

ADJUNCT ACCOUNTS – are accounts that are added to a related account such as premium on
bonds payable.
NOTE: Contra and adjunct accounts are VALUATION ACCOUNTS.
PREPARATION OF TRIAL BALANCE
A trial balance is a list of general ledger accounts with their respective debit or credit balance. Every
account in the general ledger will have either a debit, credit or zero balance.
The trial balance is a control device that helps eliminate accounting errors. When total debits do not
equal total credits, the trial balance is out of balance.
The





The






following errors are REVEALED by a trial balance.
Errors of posting to the same side of a double entry.
Errors of omission of one side of a double entry
Errors of posting where digits of number are reversed on one side of a double entry.
Errors of original entry
Errors of adding up.
following errors are NOT REVEALED by a trial balance.
Errors of omission on both sides of double entry
Errors of posting on both sides of double entry with the same amount
Errors of reverse posting in double entry
Posting to Wrong Account
Errors of accounting principle
Compensating Errors
Errors REVEALED by a trial balance.
(a) Errors of posting to the same side of double entry
Posting both accounts to debit side for 500 expense transaction.
Dr. Cash
500
Dr. Expense
500
(b) Errors of omission of one side of double entry
Posting 2,500 rental transaction to expense account only.
Dr. Rental expense
2,500
Cr. [blank]
xxx
(c) Errors of posting where digits of number are reversed on side of double entry:
Posting 450 stationary expense as 540 in expense account.
Dr. Stationary expense
540
Cr. Cash
450
(d) Errors of original entry - Making a mistake when entering a sales invoice into the sales book.
(e) Errors of adding up - Making a mistake of totaling on debit side or credit side.
Errors NOT REVEALED by a trial balance.
(a) Errors of omission on both sides of double entry
The company forgot to post the 3,000 of utility expense
Dr. [blank]
Cr. [blank]
(b) Errors of posting on both sides of double entry with the same amount
Posting 3,200 transportation expense as 3,500 in the accounting entry.
Dr. Transportation exp.
3,500
Cr. Cash
3,500
(c) Errors of reverse posting in double entry
Posting 310 maintenance expense in reverse sides as below.
Dr. Cash
310
Cr. Maintenance exp.
310
(d) Posting to Wrong Account
Posting Salaries Expense instead of Commission Expense for 500
Dr. Salaries Expense 500
Cr. Cash
500
(e) Errors of accounting principle
Posting of 550 of maintenance expense to machinery fixed asset.
Dr. Machinery
550
Cr. Cash
550
(f) Compensating Errors – If one account in the ledger is debited with 500 less and another
account in the ledger is credited 500 less, these errors cancel themselves. That is, one error is
neutralized by similar error on the opposite side.
TYPES OF TRIAL BALANCE

UNADJUSTED TRIAL BALANCE – This is prepared before adjusting entries. It contains REAL,
NOMINAL and MIXED ACCOUNTS.

ADJUSTED TRIAL BALANCE - This is prepared after adjusting entries. It contains REAL and
NOMINAL ACCOUNTS.

POST-CLOSING TRIAL BALANCE – This is prepared after the closing process. It contains REAL
ACCOUNTS ONLY.
ADJUSTING ENTRIES
Adjusting entries are made at the end of every accounting period in order to split mixed accounts or
to bring the accounts up to date. Adjusting entries allocate revenue and expenses between current
and future periods.
NOTE: ALL ADJUSTING ENTRIES involve at least one balance sheet account and one income
statement account.
METHODS OF RECORDING PREPAID EXPENSE

EXPENSE METHOD - The original payment is debited to an expense account. For example, the
payment for a one-year insurance premium is debited to insurance expense account.

ASSET METHOD - The original payment is debited to an asset account. For example, the
payment for a one-year insurance premium is debited to prepaid insurance account.
ADJUSTING ENTRY
EXPENSE METHOD
ASSET METHOD
The unused portion is recognized as asset
The incurred portion is recognized as
while the expired portion remains as
expense while the unused portion remains
expense
as asset
METHODS OF RECORDING UNEARNED INCOME

INCOME METHOD - An income account is credited for the receipt of the income. For example,
the receipt of a one-year rental is credited to rental income account.

LIABILITY METHOD - A liability account is credited for the receipt of the income. For example,
the receipt of a one-year rental is credited to unearned rental income account.
ADJUSTING ENTRY
INCOME METHOD
LIABILITY METHOD
The unearned portion is recognized as
The earned portion is recognized as income
liability while the earned portion remains
while the unearned portion remains as
as income
liability
ALLOCATION ENTRIES
Technically a prepayment using the balance sheet (Asset/liability) approach.
For example,
depreciation and amortization – allocate the cost of long‐lived assets over their useful lives.
ESTIMATION ENTRIES
An estimation adjusting entry is used to adjust the balance in a reserve, such as the allowance for
doubtful accounts or the reserve for inventory obsolescence. This is done in order to maintain adequate
reserve levels that reasonably the reflect the amount of losses from existing assets that can be expected
in future periods.
Summary of Adjustments
Nature of
Adjustments
Accruals
1.) Accrued
Expense
2.) Accrued
Income
Deferrals
3.) Prepaid
Expense
(Expense
Method)
4.) Prepaid
Expenses
(Asset
Method)
5.) Unearned
Income
(Income
Method)
6.) Unearned
Income
(Liability
Method)
Allocation Entries
7.) Depreciation
/Amortization
Estimation Entries
8.) Doubtful
Accounts
Adjusting
Journal Entry
Effect on
Profit
Assets
Liability
Equity
Over
No Effect
Under
Over
Under
Under
No Effect
Under
Under
Under
No Effect
Under
Over
Over
No Effect
Over
Over
No Effect
Under
Over
Under
No Effect
Over
Under
Dr.
Depreciation
Expense
Cr.
Accumulated
Depr’n
Over
Over
No Effect
Over
Dr. Doubtful
Accounts
Expense
Cr. Allowance
for DA
Over
Over
No Effect
Over
Dr. Expense
Cr. Payable
Dr. Receivable
Cr. Income
Dr. Prepaid
Expense
Cr. Expense
Dr. Expense
Cr. Prepaid
Expense
Dr. Income
Cr. Unearned
Income
Dr. Unearned
Income
Cr. Income
PREPARATION OF WORKSHEET
A worksheet is multicolumn sheet of paper that an accountant uses in compiling and summarizing
the information necessary for the preparation of the financial statements.
A worksheet is not a formal statement. It is only a tool of an accountant in the preparation of financial
statements.
The accountant prepares a worksheet at that stage of the accounting cycle when it is time to make
adjustments and prepare financial statements.
Actually, the balancing figure in the worksheet is the net income or net loss. If the total of the debits
exceeds the total of the credits in the income statement columns, there is a net loss. Accordingly, in
the statement of financial position columns, if the total of the credits exceeds the total of the debits,
there is also a net loss.
If the total of the credits exceeds the total of the debits in the income statement columns, there is a
net income. Accordingly, in the statement of financial position columns, if the total of the debits
exceeds the total of the credits, there is also a net income.
CLOSING ENTRIES
Closing entries are made at the end of an accounting period after adjusting entries and financial
statements have been prepared for the purpose of closing all nominal or temporary accounts. To close
an account means to reduce its balance to zero.
However, most accountants transfer nominal accounts to a clearing account known as income
summary.
The income summary account summarizes the net income or net loss for the period and its balance is
ultimately closed to capital in the case of a proprietorship or retained earnings in the case of a
corporation.
NOTE: Closing the books is an application of the PERIODICTY CONCEPT.
REVERSING ENTRIES
Reversing entries are made at the beginning of the new accounting period in order to transfer all
accrued and prepaid items established by adjusting entries to the nominal accounts that are to be
used in recording transactions during the new period.
The following are the purposes of reversing entries:

To facilitate recording of cash receipts and disbursement in the next accounting period.

To promote convenience in the recording the next period’s year-end adjustments for accruals

To promote consistency of accounting procedure.
NOTE: NOT ALL adjusting entries may be reversed. The adjustments normally requiring reversal at
the beginning of the new period are:
a.
Accrued expenses
c.
Accrued income
b.
Prepaid expenses under expense method d.
Deferred income under income method
.
QUIZZER (DO-IT-YOURSELF DRILL)
THEORIES
1.
The first step in the accounting cycle is to
A.
Record transactions in a journal
B.
Adjust the general ledger accounts
C.
Analyze transactions from source documents
D. Post journal entries to general ledger accounts
SOLUTION:
STEPS IN ACCOUNTING CYCLE
1.
Analyzing the business documents or transactions.
2.
Journalizing
3.
Posting
4.
Preparing the unadjusted trial balance
5.
Preparing the adjusting entries
6.
Preparing the financial statements
7.
Preparing the closing entries
8.
Preparing a post-closing trial balance
9.
Preparing the reversing entries
2.
It is a systematic compilation of a group of accounts.
A.
Chart of accounts
C.
Ledger
B.
Trial balance
D. Journal
SOLUTION:
LEDGER is a systematic compilation of a group of accounts.
3.
Which of the following would result to a net income for the period?
A.
Debit balance in the income summary account after closing income and expense account
B.
Credit balance exceeded debit balance in the balance sheet column of worksheet
C.
The difference between the debit and credit in the income statement column is extended to
debit balance of balance sheet column of worksheet
D. The difference between the debit and credit in the income statement column is extended to
credit balance of balance sheet column of worksheet
SOLUTION:
If the total of the credits exceeds the total of the debits in the income statement columns, there
is a net income. Accordingly, in the statement of financial position columns, if the total of the
debits exceeds the total of the credits, there is also a net income.
4.
Which of the following statements about the accounting process is incorrect?
A.
All of the accounts of a specific business enterprise are referred to as a ledger
B.
Closing the books is not part of the accounting process
C.
Like a balance sheet, the post-closing trial balance contains only real accounts.
D. The fact that an expense is recognized on the income statement indicates that equivalent
outlay of cash has been made in the same period.
SOLUTION:
Not all recognition of expense has an equivalent cash outlay in the same period. Best example
are accrued expenses; the recognition of expense is on the current year but the cash outlay will
be on the next period.
5.
Which of the following statements is not a reason for preparing end of period adjusting entries?
A.
Some transactions extend beyond one accounting period.
B.
They help to properly measure the period’s net income or net loss
C.
Mixed accounts should be split into their real and nominal elements
D. Errors discovered at the end of the period should be corrected in order to generate more
reliable financial reports.
SOLUTION:
The main purpose of adjusting entries is to adjust the balances of some accounts to properly
measure the current period’s net income or net loss since some transactions extend beyond one
accounting period. Another purpose of adjusting entries is to split mixed accounts because all
adjusting entries involve an effect on both balance sheet and income statement items.
6.
Which of the following adjusting entries will not affect both the balance sheet and income
statements?
A.
Accrued income
B.
Prepayments using the expense method
C.
Unearned income using the liability method
D. None of the choices
SOLUTION:
All adjusting entries involve an effect on both balance sheet and income statement items.
7.
Reversing entries apply to all of the following, except
A.
Unearned revenue
C.
Prepaid insurance
B.
Accrued wages
D. Depreciation
SOLUTION:
The adjustments normally requiring reversal at the beginning of the new period are:
a.
Accrued expenses
b.
Prepaid expenses under expense method
c.
Accrued income
d.
Deferred income under income method
8.
The following statements refer to the use of special journals:
Statement I: Transactions that cannot be appropriately recorded in a special journal are recorded
in the general journal.
Statement II: Sales of merchandise on account are recorded in the sales journal while cash sales
are recorded in the cash receipts journal.
Statement III: Purchases of any items on account are recorded in the purchase journal while
acquisition of any items for cash is recorded in the cash disbursements journal.
A.
Only statement I is true
C.
Only statement III is false
B.
Only statement II is false
D. All of the statements are true
SOLUTION:
Only purchases of merchandise on account are recorded in the purchase journal.
9.
When an entity sold some of its office machineries on account, the entity enters the transaction
in the
A.
Sales journal
C.
Cash receipts journal
B.
General journal
D. Cash payments journal
SOLUTION:
Only merchandise sold on account are to be recorded on sales journal. Thus, this transaction is
recorded in the general journal.
10.
The accounting equation must remain in balance
A.
Throughout each step of the accounting cycle
B.
Only when journal entries are recorded
C.
Only at the time the trial balance is prepared
D. Only when formal financial statement'; are prepared
SOLUTION:
The accounting equation is the foundation of the accounting process and it shall remain in
balance throughout each step of the accounting cycle.
11.
The financial information qualities of faithful representation, verifiability, and freedom from error
are typically applied in which of the following step of the accounting cycle?
A.
Journalizing
C.
Trial Balance preparation
B.
Posting
D. Adjusting entries
SOLUTION:
The main purpose of adjusting entries is to adjust the balances of some accounts to properly
measure the current period’s net income or net loss since some transactions extend beyond one
accounting period. Another purpose of adjusting entries is to split mixed accounts because all
adjusting entries involve an effect on both balance sheet and income statement items.
12.
Reversing entries are
1.
normally prepared for prepaid, accrued, and estimated items.
2.
necessary to achieve a proper matching of revenue and expense.
3.
desirable to exercise consistency and establish standardized procedures.
A.
1
C.
3
B.
2
D. 1 and 2
SOLUTION:
The following are the purposes of reversing entries:

To facilitate recording of cash receipts and disbursement in the next accounting period.


13.
14.
15.
To promote convenience in the recording the next period’s year-end adjustments for
accruals
To promote consistency of accounting procedure.
An unearned revenue can best be described as an amount
A.
collected and currently matched with expenses.
B.
collected but not currently matched with expenses.
C.
not collected but currently matched with expenses.
D. not collected and not currently matched with expenses.
SOLUTION:
Unearned revenue or income are amounts already collected but not yet earned (i.e. not currently
matched with expenses).
Which of the following is a real (permanent) account?
A.
Inventory
C.
Accounts Receivable
B.
Sales
D. Both Inventory and Accounts Receivable
SOLUTION:
Permanent accounts are accounts not being closed during the closing entry process. In other
words, these are balance sheet accounts.
An accounting record into which
transactions are initially recorded is
A.
ledger.
B.
account.
SOLUTION:
An accounting record into which
transactions are initially recorded is
the essential facts and figures in connection with all
called the
C.
trial balance.
D. none of these.
the essential facts and figures in connection with all
called the JOURNAL.
16.
Which of the following statements is true?
A.
Journals are used under both the double-entry system and single-entry system
B.
The accrual basis of accounting cannot be applied when using the single-entry system
,
C.
The cash basis and accrual basis of accounting can both be used under double-entry
systems but not under single-entry systems.
D. Subsidiary ledgers are used under both double and single-entry systems.
SOLUTION:
Journals are used only under the double-entry system. Using a single entry system allows the
use of accrual basis of accounting.
17.
If an entity uses the expense method of initial recording of expenses, the year-end adjusting entry
involves
A.
debiting a prepaid asset account for the expired portion of the advance payment made
B.
debiting an expense account for the expired portion of the advance payment made
C.
crediting an expense account for the unexpired portion of the advance payment made
D. crediting a prepaid asset account for the unexpired portion of the advance payment made
SOLUTION:
The adjusting entry at year-end under the expense method involves crediting the expense account
for the unexpired portion of the advance payment made.
18.
If an entity uses the asset method of initial recording of prepaid expenses, the year-end adjusting
entry involves
A.
debiting a prepaid asset account for the expired portion of the advance payment made
B.
debiting an expense account for the expired portion of the advance payment made
C.
crediting an expense account for the unexpired portion of the advance payment made
D. crediting a prepaid asset account for the unexpired portion of the advance payment made
SOLUTION:
The adjusting entry at year-end under the asset method involves debiting an expense account for
the expired portion of the advance payment made.
19.
Errors revealed by a trial balance exclude:
(1) Transplacement and transposition error
(2) Journalizing an entry twice
A.
1 only
C.
Both 1 and 2
B.
2 only
D. Neither 1 nor 2
SOLUTION:
The following errors are NOT REVEALED by a trial balance



Omitting entirely the entry for a transaction
Journalizing or posting an entry twice
Classification error
20.
Which of the following is a temporary or nominal account?
(1) Allowance for bad debts
(3) Owner’s drawing
(2) Doubtful accounts expense
(4) Unearned income
A.
1 and 2
C.
2 and 3
B.
3 and 4
D. 1 and 4
SOLUTION:
Allowance for bad debts and unearned income are real accounts.
21.
If, during an accounting period, an expense item has been incurred and consumed but not yet
paid for or recorded, then the end-of-period adjusting entry would involve
A.
a liability account and an asset account.
B.
an asset or contra asset account and an expense account.
C.
a liability account and an expense account.
D. a receivable account and a revenue account.
SOLUTION:
This is the definition of accrued expense.
22.
S1: The accrual for depreciation expense can be reversed in the next financial reporting period.
S2: There is profit if the income summary account is debited when closing to an equity account.
A.
True, false
C.
False, false
B.
False, true
D. True, true
SOLUTION:
The accrual for depreciation expense cannot be reversed in the next financial reporting period.
23.
A subsidiary ledger is
A.
A listing of accounts of a subsidiary
B.
A listing of the components of account balances
C.
A backup system to protect against record destruction
D. A listing of account balances just before closing entries are prepared
SOLUTION:
Subsidiary ledger is the device used in storing the details of certain general ledger accounts.
24.
Which of the following statements is incorrect?
A.
Accounts in the ledger follow the T-account format, wherein the left side is known as the
debit side while the right side is known as the credit side.
B.
Not all accounts both have a general and subsidiary ledger.
C.
The year-end adjusting entry made for prepaid expenses under asset method can be
reversed at the beginning date of the subsequent accounting period.
D. The preparation of worksheet is optional in the accounting process.
SOLUTION:
Only the year year-end adjusting entry made for prepaid expenses under EXPENSE METHOD
can be reversed at the beginning date of the subsequent accounting period.
25.
Which of the below statements is correct?
S1: The trial balance can only reveal errors that will caused the total debits and total credits to
be unequal.
S2: The preparation of the unadjusted and post-closing trial balance and preparation of
financial statements are optional steps in the accounting cycle.
A.
S1 only
C.
Both statements
B.
S2 only
D. Neither from the statements
SOLUTION:
Only the preparation of the unadjusted and post-closing trial balance is an optional step in the
accounting cycle.
26.
Which of the following statements is true regarding debits and credits?
A.
Before adjustments, debits will not equal credits in the trial balance.
B.
The rules for debit and credit and the normal balance of share capital are the same as for
liabilities.
C.
In the income statement, revenue is increased by a debit whereas in the statement of
financial position, retained earnings account is increased by a credit.
D.
On the income statement, debits are used to increase account balances, whereas on the
statement of financial position, credits are used to increase account balances.
SOLUTION:
Whether adjusted or unadjusted, the trial balance shall be balanced.
27.
Which of the following is an example of an accrued expense?
A.
Depreciation expense
B.
Property tax incurred during the year to be paid next year
C.
Rent earned during the current year to be received at the end of next year
D. Equipment purchased at the beginning of the year and debited to an expense account
SOLUTION:
Accrued expense is an expense already incurred but not yet paid.
28.
The recording phase of financial accounting covers the following steps, except
A.
Transactions are journalized
B.
Financial statements are prepared
C.
Transactions are posted to the ledger
D. Business documents are received and prepared
SOLUTION:
The preparations of financial statements are within the summarization phase of the accounting
cycle.
Which of the following is not a principal purpose of a trial balance?
A.
It supplies a listing of open accounts and their balances
B.
It is the basis for any adjustments to the account balances
C.
It provides that debits and credits of equal amounts are in the ledger
D. It proves that debits and credits were properly entered in the ledger accounts
SOLUTION:
A balanced trial balance does not necessarily show that the items and balances were properly
entered in their respective ledger accounts.
29.
30.
Which one of the following is a purpose of adjusting entries?
I.
To apportion the proper amounts of revenue and expense to the current accounting period.
II.
To establish the proper amounts of assets and liabilities in the balance sheet.
III. To accomplish the objective of offsetting the revenue of the period with all the expenses
incurred in generating that revenue.
IV. To prepare the revenue and expense accounts for recording transactions of the following
period.
A.
I and II only
C.
I, II and III only
B.
II and III only
D. All of these
SOLUTION:
The main purpose of adjusting entries is to adjust the balances of some accounts to properly
measure the current period’s net income or net loss since some transactions extend beyond one
accounting period. Another purpose of adjusting entries is to split mixed accounts because all
adjusting entries involve an effect on both balance sheet and income statement items.
31.
It is the basic storage of information in accounting.
A.
Journal entry
C.
Debit or Credit
B.
T-account
D. Account
SOLUTION:
Accounts is the basic storage of information in accounting. The accounts used by a particular
entity are usually expressed in the form of chart of accounts. A chart of accounts is a listing of
all the entity's general ledger accounts in a systematic form.
32.
Adjusting entries that should be 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.
SOLUTION:
Only adjusting entries for unearned income under income method and prepaid expense under
expense method are subject to reversing entries.
33.
KGA CORP. initially records payments in balance sheet accounts and make reversing entries
when appropriate. Which of the following year-end adjusting entries should be reversed?
A.
The entry to record supplies used during the period
B.
The entry to record the bad debts expense for the period
C.
The entry to record service fees earned by year-end but not billed
D. The entry to record the portion of service fees received in advance that is earned by yearend
SOLUTION:
The entry to record supplies used during the period, signify that the prepaid expense was
recorded using asset method while the entry to record the portion of service fees received in
advance that is earned by year-end signify that the unearned income was recorded using liability
method.
34.
Adjustments are often prepared
A.
After the statement of financial position date and dated after that date.
B.
After the statement of financial position date and dated as of that date.
C.
Before the statement of financial position date and dated after that date.
D. Before the statement of financial position date and dated as of that date.
SOLUTION:
Adjusting entries are made to update the balances of the current period but take note, these are
often prepared after year-end and dated as of year-end.
35.
Which of the following statements best describes the purpose of closing entries?
A.
To facilitate posting and taking a trial balance.
B.
To determine the amount of net income or net loss for the period.
C.
To complete the record of various transactions that were started in a prior period.
D. To reduce the balances of temporary accounts to zero so that they may be used to
accumulate the revenue, expenses and dividends of the next period.
SOLUTION:
Closing entries are made at the end of an accounting period after adjusting entries and financial
statements have been prepared for the purpose of closing all nominal or temporary accounts. To
close an account means to reduce its balance to zero.
36.
It is a list of accounts and their balances.
A.
Chart of accounts
C.
Ledger
B.
Trial balance
D. Journal
SOLUTION:
If the question is only a list of accounts then the answer is chart of accounts.
37.
This concept views each transaction as having a two-fold effect on values - a value received and
a value parted with, and each transaction is recorded using at least two accounts.
A.
Equilibrium
C.
Double-entry.
B.
Duality
D. Twins concept
SOLUTION:
The concept of duality views each transaction as having a two-fold effect on values - a value
received and a value parted with, and each transaction is recorded using at least two accounts.
This is one of the fundamental concepts of dual entry bookkeeping.
38.
The
A.
B.
C.
39.
Which of the following is a real account?
A.
Freight-in
C.
Accumulated depreciation
B.
Freight-out
D. Interest expense
SOLUTION:
The other choices, being an income statement item, are nominal accounts.
postclosing trial balance
Consists of statement of financial position accounts only.
Shows that the accounting equation is in balance at the end of the accounting period.
Will balance if a transaction is not journalized and posted, or if a transaction is journalized
and posted twice.
D. All of the choices are correct regarding the post-closing trial balance.
SOLUTION:
When a transaction is not journalized and posted, or if a transaction is journalized and posted
twice, trial balance remains balanced and thus it cannot reveal such error.
40.
Under the cash basis of accounting, revenues are recorded
A.
when they are earned and realized.
B.
when they are earned and realizable.
C.
when they are earned.
D. when they are realized.
SOLUTION:
Under the cash basis of accounting, revenues are recorded when cash is received (i.e. when the
revenue is realized.
PROBLEMS
1.
A P 4,650 debit to utilities expense was incorrectly posted as a P465 debit. What is the effect of
this error on the trial balance and the utilities expense account?
A.
The debit column of the trial balance would be P 4,185 too low and utilities expense would
be understated by P 4,185.
B.
The debit column of the trial balance would be P 4,185 too high and utilities expense would
be understated by P 4,185.
C.
The debit column of the trial balance would be P 4,185 too low and utilities expense would
be overstated by P 4,185.
D. The debit column of the trial balance would be P 4,185 too high and utilities expense would
be overstated by P 4,185.
SOLUTION:
Since the normal balance of utilities expense is debit, then the debit column of the trial is lower
by P4,185 and utilities expense is lower by P4,185.
2.
The trial balance totals of LEO CORP. at 30 September 2020 are:
Debit
P 992,640
Credit.
P1,026,480
Which TWO of the following possible errors could, when corrected, cause the trial balance to
agree?
1)
An item in the cash book P6,160 for payment of rent has not been entered in the rent
payable account.
2)
The balance on the motor expenses account P27,680 has incorrectly been listed in the trial
balance as a credit.
3)
P6,160 proceeds of sale of a motor vehicle has been posted to the debit of motor vehicles
asset account.
4)
The balance of P21.520 on the rent receivable account has been omitted from the trial
balance.
A.
1 and 2
C.
2 and 4
B.
2 and 3
D. 3 and 4
SOLUTION:
Effect of errors: (2) increased debit 55,360; (4) increased credit 21,520. Net effect of errors 33,840
net debit.
3.
The debit side of a trial balance totals P800 more than the credit side. Which one of the following
errors would fully account for the difference?
A.
P400 paid for plant maintenance has been correctly entered in the cash book and credited
to the plant asset account.
B.
Discount received P400 has been debited to discount allowed account.
C.
A receipt of P800 for commission receivable has been omitted from the records.
D. The petty cash balance of P800 has been omitted from the trial balance.
SOLUTION:
400 debit which should have been credited – correction will bring trial balance into agreement.
4.
A business pays weekly salaries of P20,000 on Friday for a five-day week ending on that day. The
adjusting entry necessary at the end of the fiscal period ending on Thursday is
A.
debit Salaries Payable, P16,000; credit Cash, P16,000
B.
debit Salary Expense, P16,000; credit Dividends, P16,000
C.
debit Salary Expense, P16,000; credit Salaries Payable, P16,000
D. debit Drawing, P16,000; credit Cash, P16,000
SOLUTION:
(P20,000 x 4/5) = since the year ended on a Thursday.
5.
The following adjusting journal entry was found on page 4 of the journal. Select the best
explanation for the entry.
Unearned Revenue
4,500
Fees earned
4,500
????????????????
A.
Record payment of fees earned
B.
Record fees earned at the end of the month
C.
Record fees that have not been earned at the end of the month
D. Record the payment of fees to be earned.
SOLUTION:
This is an adjusting entry for unearned income where periodically, an entity recognizes the
portion earned of its professional fees received in advance.
6.
At the end of the current year, the prepaid insurance account showed a debit the balance of
P5,000; the balance at the beginning of the year was P6,000, and during the year the insurance
premiums paid amounted to P8,000. Assuming insurance premium payments are initially
entered in the prepaid insurance account ,the adjusting entry at the end of the year would
include:
A.
debit prepaid insurance P9,000
C.
debit insurance expense P7,000
B.
credit prepaid insurance P1,000
D. debit insurance expense P9,000
SOLUTION:
Beginning balance
P6,000
Prepaid insurance during the year
8,000
Insurance expense (SQUEEZE)
9,000
Prepaid insurance ending
P5,000
7.
The September 30 trial balance of PIESCES CORP. shows the following information:
Accounts receivable
8,060 Equipment
42,120
Accounts payable
6,370 Other expense
4,940
Accumulated depreciation
21,060 Owner's drawings
5,460
Advertising expense
390 Owner's equity
28,600
Cash
7,540 Sales
12,480
Depreciation expense of P702 is not yet recorded. In an after-closing trial balance prepared on
September 30, the total of the credit column will be
A.
57,270
C.
57,720
B.
62,660
D. 57,018
SOLUTION:
Dr.
Cr.
Cash
7,540
Accounts receivable
8,060
Equipment
42,120
Accumulated depreciation
21,762 a
Accounts payable
6,370
Owner's equity
29,588 b
Totals
57,720
57,720
Accumulated depreciation - beg.
Depreciation expense
Accumulated depreciation - end.
P21,060
702
P21,762 a
Owner's equity - beg.
Sales
Depreciation expense
Advertising expense
Other expense
Owner's drawings
Owner's equity - end.
P28,600
12,480
(702)
(390)
(4,940)
(5,460)
P29,588 b
Use the following information in answering the next item(s):
AQUARIUS CORP.
Worksheet
For the Year Ended December 31, 2020
Account Title
Cash
Accounts Receivable
Supplies
Equipment
Accumulated Depr-Equip
Accounts Payable
Wages Payable
Capital Stock
Dividends
Fees Earned
Wages Expense
Rent Expense
Depreciation Expense
Totals
Net Income (Loss)
Adjusted Trial Balance
Debit
Credit
16,000
6,000
2,000
19,000
6,000
Income Statement
Debit
Credit
Balance Sheet
Debit
Credit
16,000
6,000
2,000
19,000
6,000
10,000
2,000
11,000
10,000
2,000
11,000
1,000
1,000
47,000
21,000
6,000
5,000
76,000
76,000
47,000
21,000
6,000
5,000
32,000
15,000
47,000
47,000
44,000
47,000
44,000
29,000
15,000
44,000
8.
The
A.
B.
C.
D.
journal entry to close revenues would be:
debit Income Summary P47,000, credit Fees Earned P47,000
debit Retained Earnings P47,000, credit Fees Earned P47,000
debit Fees Earned P47,000; credit Income Summary P47,000
credit Fees Earned P47,000; credit Capital Stock P47,000
9.
Based on the preceding trial balance, the entry to close income summary would be:
A.
debit Income Summary P15,000; credit Retained Earnings P4,000
B.
debit Income Summary P47,000; credit Retained Earnings P47,000
C.
debit Income Summary P15,000, credit Retained Earnings P15,000
D. debit Retained Earnings P4,000; credit Income Summary P4,000
SOLUTION:
Fees earned
P47,000
Expenses:
Wages Expense
21,000
Rent Expense
6,000
Depreciation Expense
5,000
Net income
P15,000
10.
The work sheet at the end of September has P4,000 in the Balance Sheet credit column for
Accumulated Depreciation. The work sheet at the end of October has P4,750 in the Balance Sheet
credit column for Accumulated Depreciation. What was the amount of the depreciation expense
adjustment for the month of October?
A.
amount cannot be determined
C.
P4,000
B.
P4,750
D. P750
SOLUTION:
(P4,750 – P4,000) = P750
- END OF HANDOUTS -