legal accounting
Post on 05-Dec-2014
55 Views
Preview:
DESCRIPTION
TRANSCRIPT
Lesson Number Topic Starting Page
1 Introduction to Accounting
3
2 Transaction Analysis
12
3 General Journal, General Ledger,
Trial Balance
22
4 Financial Statements
29
5 Statement of Cash Flows
36
6 Correcting Entries 387 Payroll Accounting 408 Accounting for
Promissory Notes43
9 Accrued Income 5210 Accrued Expense 5511 Prepaid Expense 5812 Unearned Income 6213 Depreciation 6614 Doubtful Accounts 7115 Closing Entries,
Post-Closing Trial Balance
76
16 Reversing Entries 82TABLE OF CONTENTS
LESSON 1INTRODUCTION TO ACCOUNTING
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Learn the history of accounting2 Define accounting3 Know the difference between
bookkeeping andaccounting
4 Know the branches of accounting5 Distinguish the forms of business
organizationsaccording to ownership and according
to activity6 Know the role of Certified Public
Accountant in thesociety
7 Know the functions of different government agencies and
professional bodies relevant to the accounting profession
8 Know the purposes of the business documents
9 Define financial statements and its components, generally
accepted accounting principles (GAAP), Financial
Reporting Standards Council (FRSC), and users of the
financial statements10 Explain the different basic accounting
concepts orassumptions
11 Know other terms related to basic accounting
Objective 1
History of Accounting
Accounting has a long history. Some scholars claim that writing arose in order to record information. Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labor and materials used in building structures like the great pyramids. (Source: Horngren, Harrison and Robinson, 1995) Accounting developed as a result of the information needs of merchants in the city-states of Italy during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematician and friend of Leonardo da Vinci, published the first known description of double-entry bookkeeping entitled Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Everything about Arithmetic, Geometry, and Proportion published in Venice in November 1494. This book contained primarily principles of mathematics and incidentally a set of accounting procedures.N The pace of accounting development increased during the Industrial Revolution as the economies of developed countries began to mass produce goods. Until that time, merchandise was priced based on managers’ hunches about cost but increased competition required merchants to adopt more sophisticated accounting system. In the nineteenth century, the growth of corporations especially those in the railroad and steel industries, spurred the developed of accounting. Corporate owners were no longer necessarily the managers of their business. Managers had to create accounting systems to report to the owners how well their businesses were doing.Government played a role in leading more development in the field of accounting when it started using the income tax. Accounting supplied the concept of income. Also, government at all levels has assumed expanded roles in health, education, labor and economic planning. To ensure that the information that it uses to make decisions is reliable, the government has required strict accountability in the business community. At the beginning of the third millennium, there would still be significant developments in thefield of accounting. The great challenge of globalization and the effects of new technologies (e.g. super computers, robotics, inter and intra-net, etc.) pose a shift in the structure and pattern in this field. More and better accounting information are now being required and therefore, accounting, being the means used in communicating business and financial information, must also evolve into a more efficient level.
Reference: Workbook in Introductory Accounting for Service Business
Accounting as “Language of Business”The primary objectives of the business are:1. To generate profits2. To properly manage limited and scarce resources
With these objectives, a business must prepare financial reports and interpret these reports as an aid in decision-making. In making decisions, accounting is used as a tool for communication.
Objective 2Definition of Accounting1. Accounting is a service activity.a. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.
2. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.a. Identifying – this accounting process is the recognition or non recognition of business activities as “accountable events” (Valix, 2005). There are 3 types of transactions:i. Business transaction – 1. Transactions which are recorded in the financial books. Example is investment of the owner.
ii. Personal transaction – 1. Transactions which are not recorded in the financial books. Example is purchase of house and lot of a business owner using his personal money.
iii. Neither business nor personal transaction – 1. Business events that are not recorded in the financial books. Examples are hiring of employees, death of the owner, entering into a contract etc.
b. Measuring – this accounting process is the assigning of Peso amounts to the accountable economic transactions and events (Valix, 2005)
c. Communicating – is the process of preparing financial statements and interpreting the results thereof
3. Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.
4. Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity.
Objective 3Difference between Bookkeeping and Accounting
Bookkeeping Accounting Recording of transactions Preparing financial reports
Recording of transactions Preparing financial reports Analyzing financial reports Decision-making
Objective 4Branches of Accounting
1. Financial Accounting – is primarily concerned with the recording of business transactions and the eventual preparation of financial statements (Valix, 2005).
2. Cost Accounting – is primarily concerned with proper accumulation of costs such as materials, labor and overhead, proper costing of inventories and study of different costing methods.
3. Management Accounting – is the preparation of financial reports and management research intended for management use and interpretation of these reports and researches.
Examples of financial reports are Sales reports, Cost of Production reports, Budgets etc.
Example of management research is evaluation of a business process and management consulting.
4. Taxation – deals with the study of provisions of the law with regard to Philippine taxation system and proper computation of taxes such as income tax, value-added tax, withholding tax and other taxes.
5. Auditing – basically deals with the examination of the financial statements by an independent party (auditor) to ascertain whether such financial statements are in conformity with Philippine Accounting Standards.
Objective 5Forms of Business Organizations
1. According to ownership
a. Sole-proprietorship – owned by only one person called sole-proprietor
b. Partnership – owned by 2 or more persons called partners
c. Corporation – owned by 5 or more persons called shareholders
2. According to activity
a. Service – renders services to the public such accounting firms, law firms, consulting firms, SPA, medical clinics, dental clinics, schools etc
b. Merchandising – buys and sells merchandise to the public
c. Manufacturing – buys raw materials and converts them into finished goods to be sold to the public
Objective 6Certified Public Accountant (CPA)
- is an accounting professional doing accounting, audit, tax, management consulting, education and research work.- Types of Accountants
Private Accountant / Management Accountant is an accounting professional employed in a private company or organization
Public Accountant / Auditor is an accounting professional independent from the private organizations and is usually employed in an auditing firm.
Government Accountant is an accounting professional employed in a government agency
Accounting Educator and Researcher is an accounting professional employed in a university, college or research organization
Objective 7Government Agencies and Professional Bodies1. Bureau of Internal Revenue (BIR) – agency in charge of proper collection of taxes from the public.
2. Securities and Exchange Commission (SEC) – agency in charge of accumulating audited financial statements of organizations, regulating companies issuing securities such as stocks and bonds to the public, and monitoring companies in the insurance industry. This agency also facilitates the registration of partnerships and corporations.
3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines – agency in charge of regulating Philippine bank operations, setting Philippine monetary policies etc.
4. Philippine Stock Exchange (PSE) – agency in charge of monitoring securities transactions of companies listed in the stock exchange.
5. Department of Trade and Industry (DTI) – agency in charge of facilitating registration of sole-proprietorship businesses and regulating consumer commodity transactions.
6. Commission on Audit (COA) – agency in charge of auditing government-related transactions
7. Board of Accountancy (BOA) - is an accounting body in charge of administering licensure examination for accountants
8. Professional Regulation Commission (PRC) - government agency in charge of issuing licenses to successful examinees in board exams
9. Philippine Institute of Certified Public Accountants (PICPA) - Professional organization of accountants in the Philippines
10. City Hall and Baranggay – these political subdivisions issues business permits and collects business taxes.
Objective 8
Business Documents
1. Purchase Order – shows items to be ordered by the business
2. Delivery Receipt – shows items to be delivered in the business
3. Sales Invoice – shows items that were sold to the business
4. Statement of Account – shows the summary of sales invoices
5. Cash Voucher – shows the liability of the business to be paid in the future
6. Official Receipt – shows the amount received by the business
Objective 9
Financial Statements
- Shows the results of the recording of the business transactions and are expressed in terms of assets, liabilities, equity, income and expenses.- Six (6) Components
Balance Sheet / Statement of Financial PositionPresents the financial condition of the business through its assets, liabilities and capital / owner’s equity
Income StatementPresents the financial performance of the business through its income and expenses
Statement of Changes in Owner’s EquityPresents the changes in capital such as additional investments, withdrawals, net income and/or net loss
Statement of Cash FlowsPresents the cash inflows and outflows of the business through its operating, investing and financing activities
Statement of Comprehensive IncomePresents gains and losses that were not presented in the income statement. Examples are unrealized gain on sale of trading securities, Foreign exchange gain on translation etc.
Notes to the Financial StatementsPresents the details of the line items in the Balance Sheet and Income Statement
Generally Accepted Accounting Principles (GAAP)- Refers to rules, procedures, practice and standards followed in the preparation and presentation of financial statements (Valix, 2005).
Financial Reporting and Standards Council (FRSC)- The council establishes and improves accounting standards that will be generally accepted in the Philippines (Valix, 2005)
Users of the Financial Statements
Internal Users External Users
1. Management2. Employees
1. Investors2. Creditors / Lenders3. Suppliers / Vendors4. Government5. Public
Objective 10
Basic Accounting Concepts / Assumptions1. Entity
a. Under this concept, the business enterprise is viewed as separate from the owners, managers, and employees of the business (Valix, 2005)
2. Time perioda. This concept requires that the indefinite life of an enterprise is subdivided into time periods which are usually of equal length (Valix, 2005)
b. Calendar year is a 12-month period that ends on December 31, otherwise it is called Natural business year or Fiscal year (Valix, 2005)
3. Monetary unita. This concept assumes that financial transactions be measured in terms of money or currency of the Philippines
4. Costa. This concept requires that assets should be recorded initially at original acquisition cost (Valix, 2005)
5. Adequate disclosurea. This concept requires that all significant and relevant information leading to the preparation of financial statements should be clearly reported (Valix, 2005)
6. Materialitya. This concept relates to the significance of an item to the overall presentation of the financial statements. Information is material if its omission could influence the economic decision of the users of the financial statements (Valix, 2005)
7. Accruala. This concept requires the income earned must be recognized in the financial statements whether cash is received or not.
b. This concept also requires the expenses incurred must be recognized in the financial statements whether cash is paid or not.
c. Because of this concept, organizations are preparing adjusting journal entries to recognize accrued income and accrued expenses.
d. Accrued income refers to income earned but not yet received.
e. Accrued expense refers to expense incurred but not yet paid.
8. Consistencya. This concept requires that the accounting methods and practices should be applied on a uniform basis from one time period to another (Valix, 2005).
9. Comparability
a. There are 2 kinds of comparability: Comparability within an enterprise andComparability between enterprises (Valix, 2005)
b. Comparability within an enterprise is the quality of information that allows comparisons within a single enterprise from one time period to the next (Valix, 2005)
c. Comparability between enterprises is the quality of information that allows comparisons between two or more enterprises engaged in the same industry (Valix, 2005)
10. Going Concern
a. This concept assumes that business will operate indefinitely and there is no intention of liquidating or closing down the business
11. Revenue recognition
a. Same as accrued income concept
12. Expense recognition
a. Same as accrued expense concept
13. Matchinga. This concept requires that costs and expenses incurred in earning a revenue should be reported in the same period when the revenue or income is earned (Valix, 2005)
14. Conservatism
a. Under this concept, when alternatives exist, the alternative which has the least effect on net income or owner’s equity should be chosen (Valix, 2005)
b. Conservatism is synonymous with Prudence. Prudence is the desire to exercise care and caution when dealing with the uncertainties in the measurement process such as assets or income are not overstated and liabilities or expenses are not understated (Valix, 2005)
15. Objectivitya. This concept requires that financial transactions that were recorded be supported by business documents
Objective 11Other Terms
Liquidity Solvency- Refers to the ability of the organizationto pay its short-term (current)obligations
- Refers to the ability of the organizationto pay its long-term (noncurrent)obligations
Stock Certificate – evidence certifying the ownership of shares of stock of a shareholder.Further ReadingsKieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 2 – 11, 21, 25, 29 – 31, 92 – 94
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.
LESSON 2TRANSACTION ANALYSIS
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Define the accounting equation and know the effects ofthe financial transactions on the accounting equation
2 Familiarize with the types of accounts for assets,liabilities, capital, income and expenses
Objective 1The Accounting Equation
Assets = Liabilities + Capital
The equation states that business assets are financed by two parties. They are the creditors or vendors (liabilities) and the owner (capital). Income will increase assets as well as capital and expenses will decrease assets as well as capital. Business transactions will have an effect on the accounting equation. The following are the basic financial transactions and the effects on the accounting equation.
Transaction ASSETS LIABILITIES CAPITALInvestment of the owner
▲ ▲ Investment
Withdrawal of the owner
▼ ▼ Withdrawal
Borrowed money byIssuing a promissory note
▲ ▲
Payment of the ▼ ▼ ▼ Interestexpense
principaland interest of thepromissory note
Purchase of short-terminvestment for cash
▲▼
Sale of short-terminvestment at a gain
▲▼ ▲ Gain on saleof investment
in tradingsecurities
Sale of short-terminvestment at a loss
▲▼ ▼ Loss on saleof investment
in tradingsecurities
Cash advance to anemployee
▲▼
Purchase of supplies forcash
▲▼
Purchase of supplies onaccount
▲ ▲
Purchase of a fixed assetfor cash
▲▼
Purchase of a fixed asset onAccount
▲ ▲
Partial / Full ▼ ▼
payment ofaccounts payable
Sale of a fixed asset at again
▲▼ ▲ Gain on saleof equipment
Sale of a fixed asset at aloss
▲▼ ▼ Loss on saleof equipment
Rendered services for cash
▲ ▲ ServiceIncome
Rendered services onaccount
▲ ▲ ServiceIncome
Partial / Full collection ofaccounts receivable
▲▼
Received cash forcommission income
▲ ▲ CommissionIncome
Payment of expenses forcash
▼ ▼ Expense
Objective 2Types of Accounts
CATEGORY DEFINITION ACCOUNT TITLE DEFINITION /EXAMPLES
ASSETS
CASH
This includes billsand coins, bankcheck, bankAccounts.
PETTY CASH FUND Cash used to paypetty or smallamount ofExpenses.
CASH ON HAND Cash in thepossession andcustody of theBusiness.
CASH IN BANK Self-explanatory
INVESTMENT INTRADING
SECURITIES
This refers to short term,highly liquidinvestment insecurities such asStocks and bonds.
TRADE AND OTHERECEIVABLES
These refer toamounts collectiblefrom a person or acompany
ACCOUNTSRECEIVABLE
Amount collectiblefrom clients orcustomers forservices rendered or
sale of goodsALLOWANCE FORDOUBTFULACCOUNTS
Is a Contra-assetaccount thatrepresents provisionfor estimateddoubtful accounts
NOTES RECEIVABLE Same withAccountsReceivable but isevidenced by apromissory note
INTERESTRECEIVABLE
Amount collectiblein a loan transaction
COMMISSIONRECEIVABLE
RENT RECEIVABLE
ADVANCES TOEMPLOYEES
Cash advance givento employees
PREPAID EXPENSES These refer toexpenses that arepaid in advance
PREPAID RENT
PREPAIDINSURANCE
PREPAIDADVERTISING
PREPAIDSUBSCRIPTIONS
OFFICE SUPPLIES
STORE SUPPLIES
PROPERTY, PLANTAND EQUIPMENT
These refer to itemsthat are useful formore than 1 year
LAND
OFFICE EQUIPMENT Computer, Faxmachine
STORE EQUIPMENT Cash registermachine
TRANSPORTATIONEQUIPMENT
Delivery Van,Motorcycle, Cars,Trucks
FURNITURE ANDFIXTURES
Cabinets, Tables,Chairs
MACHINERY
BUILDING Office building,Factory plant
ACCUMULATEDDEPRECIATION
Is a Contra-assetaccount thatrepresentscumulativedepreciation for
depreciable fixedassets
LIABILITIES
TRADE AND OTHERPAYABLES
These refer toamounts payable toa person or acompany
ACCOUNTSPAYABLE
Amount payable tosupplier, creditor orvendor for money,supplies, goods orproperty loaned
NOTES PAYABLE Same withAccounts Payablebut is evidenced bya promissory note
DISCOUNT ONNOTES PAYABLE
Is a Contra-liabilityaccount thatrepresentsunamortizedinterest on thepromissory note
INTEREST PAYABLE Amount payable ina loan transaction
TAXES ANDLICENSES PAYABLE
Unpaid taxes andlicenses to beremitted / paid tothe government
UTILITIES PAYABLE Unpaidcommunication,light and water bills
SALARIES ANDWAGES PAYABLE
Unpaid salaries andwages of theemployees
UNEARNED INCOME This refers to cashreceived in advancebut not yet earned
UNEARNED RENT
UNEARNEDADVERTISING
UNEARNEDSUBSCRIPTIONS
UNEARNEDCOMMISSION
MORTGAGEPAYABLE
This refers to bankloan with assetssuch as house andlot or vehicle ascollaterals
BONDS PAYABLE This refers to loanthat is evidenced bya bond certificateor indenture
CAPITAL / OWNER’S EQUITY
OWNER, CAPITAL This refer to claimor interest of theowner
OWNER, DRAWING This refer totemporarywithdrawal of theowner of cash,supplies, goods or property
INCOME
SERVICE INCOME Income derivedfrom rendering ofservicesPrimary income forservice business
OTHER INCOME Secondary incomefor service business
INTEREST INCOME Income from loantransactions
DIVIDEND INCOME Income from stockinvestments
RENT INCOME
GAIN ON SALE OF Excess of selling
EQUIPMENT price over the netbook value of thefixed asset
EXPENSES
EMPLOYEE BENEFITCOST
Expenses related toemployee benefits
SALARIES ANDWAGES EXPENSE
Represents the totalgross salary orwages of theemployees
SSS PREMIUMSEXPENSE
Represents totalSSS (health benefit)contributions of theemployer and theemployees
PHILHEALTHCONTRIBUTIONSEXPENSE
Represents totalPhilhealth (healthbenefit)contributions of theemployer and theemployees
PAG-IBIGCONTRIBUTIONSEXPENSE
Represents totalPag-IBIG (housingbenefit)contributions of theemployer and theemployees
RENT EXPENSE
PROFESSIONAL FEES Expense related toprofessionalservices ofaccountants,lawyers etc
ADVERTISINGEXPENSE
COMMISSIONEXPENSE
REPAIR ANDMAINTENANCEEXPENSE
Expense related topayment ofcommission to agents
SUPPLIES EXPENSE
INSURANCEEXPENSE
REPRESENTATIONANDENTERTAINMENTEXPENSE
Expense related tocost of meetingswith clients such asmeals
TRANSPORTATIONEXPENSE
Expense related tocommuting fromthe office toclient’s office
FUEL AND OILEXPENSE
UTILITIES EXPENSE Expense related tocommunicationsuch as telephone,Internet, electricityand water
TAXES ANDLICENSES EXPENSE
Expense related tobusiness taxes andpermits from thecity hall
CHARITABLECONTRIBUTIONEXPENSE
Expense related todonations
DEPRECIATIONEXPENSE
Noncash expensethat represents thetotal depreciationof the depreciablefixed assets for theyear
DOUBTFULACCOUNTS EXPENSE
Noncash expensethat represents thetotal estimateddoubtful accountsfor the year
BAD DEBTSEXPENSE
Noncash expensethat represents thetotal accountsreceivable thatwere written-off /removed from thefinancial books due
to its provenun collectability
MISCELLANEOUSEXPENSE
OTHER EXPENSE LOSS ON SALE OFEQUIPMENT
Excess of net bookvalue over theselling price of thefixed asset
FINANCE COST INTEREST EXPENSE Expense from loantransactions
Further ReadingsKieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 14 – 20, 26 – 27, 159 – 164
Kim well, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.Created with
LESSON 3GENERAL JOURNAL, GENERAL LEDGER TRIAL BALANCE
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Know the concept of double-entry bookkeeping and theappropriate accounting tool for financial transactions
2 Understand the concept of journalizing and preparejournal entries
3 Post journal entries to the general ledgers4 Prepare the trial balance
Objective 1Double-entry Bookkeeping
This concept uses the tools debit and credit to record financial transactions. Further, this concept dictates that “for every debit, there is at least one credit and vice-versa”.
Appropriate Accounting Tool
The table shows the appropriate accounting tool for the effects of the financial transactions on assets, liabilities, capital, income and expenses.
Increase Decrease
Asset Debit CreditLiability Credit DebitCapital Credit DebitIncome Credit
Expense Debit
Objective 2Journalizing
This refers to the process of recording the financial transactions in the General Journal. General Journal is also known as “Book of Original Entry”. The following are examples of Journal Entries:
Journalize the following selected transactions of MJ Dry Cleaning. The following transaction occurred during June 2010.
1 MJ Flores invested in the business the following: P 250,000 cash and P 420,000 worth of
dry cleaning equipment with fair value of P 400,000 but with existing liability of P100,000 which is to be assumed by the business 2 Purchased dry cleaning supplies from Wilson Cleaners for P 22,100, payable after 20days 4 Bought cash register from Carter Equipment, P 45,800. Terms: 30% down payment,balance on account7 Dry cleaning services rendered for the week totaled P 25,250 cash
GENERAL JOURNAL Page xx
Date Particulars F Debit Credit2010Jun 01 Cash 101 250 000
Dry Cleaning Equipment 110 400 000Accounts Payable 210 100 000MJ Flores, Capital 320 550 000Investment of the owner
02 Dry Cleaning Supplies 108 22 100Accounts Payable 210 22 100Purchase of supplies on account
04 Office Equipment 111 45 800Cash 101 13 470Accounts Payable 210 32 060Purchase of cash register
07 CashDry Cleaning Service IncomeRendered dry cleaning service
for cash
Simple entry and Compound entry
Simple entry is a journal with only one debit and one credit. Compound entry is a journal entry with at least two debits or at least two credits.
Objective 3
Posting
This refers to the process of transferring the debit and credit amounts to the appropriate ledger accounts. Ledger accounts are placed in a financial book called General Ledger. This is also known as “Book of Final Entry”. After the amounts have been posted, one should post the ledger account number back to the general journal. This process is known as “cross-referencing”.
Chart of Accounts
This chart lists the account titles to be used by the business and the related account numbers. The following is a typical example of chart of accounts.
ASSETS 100 OWNER’S EQUITY 300
Cash 101 MJ Flores, Drawing 310Investment in Trading Securities 102 MJ Flores, Capital 320Accounts Receivable 103Allowance for Doubtful Accounts 104Notes Receivable 105 INCOME 400Advances to Employees 106
Prepaid Rent 107 Dry Cleaning Service Income 410Dry Cleaning Supplies 108 Interest Income 420Land 109Dry Cleaning Equipment 110Office Equipment 111 EXPENSES 500Building 120Accumulated Depreciation –Dry Cleaning Equipment
130 Salaries and Wages Expense 510
Accumulated Depreciation –Office Equipment
131 Rent Expense 520
Accumulated Depreciation – Building
140 Advertising Expense 530
Commission Expense 540LIABILITIES 200 Dry Cleaning Supplies Expense 550
Insurance Expense 560Accounts Payable 210 Transportation Expense 570Notes Payable 220 Utilities Expense 580Discount on Notes Payable 230 Taxes and Licenses Expense 590Unearned Advertising 240 Depreciation Expense 591Mortgage Payable 250 Interest Expense 592
General Ledger Postings
CASH 101
Date Particulars F Debit Date Particulars F Credit2010 2010Jun 01 GJ1 250 000 Jun 04 GJ1 13 470 07 GJ1 25 250
Totals 275 250 13 470Balance 261 780
DRY CLEANING SUPPLIES 108
Date Particulars F Debit Date Particulars F Credit2010Jun 02 GJ1 22 100
DRY CLEANING EQUIPMENT 110
Date Particulars F Debit Date Particulars F Credit2010Jun 01 GJ1 400 000
OFFICE EQUIPMENT 111
Date Particulars F Debit Date Particulars F Credit2010Jun 01 GJ1 45 800
ACCOUNTS PAYABLE 210
Date Particulars F Debit Date Particulars F Credit2010Jun 01 GJ1 100 000 02 GJ1 22 100 04 GJ1 32 060
MJ FLORES, CAPITAL 320
Date Particulars F Debit Date Particulars F Credit2010Jun 01 GJ1 25 250
DRY CLEANING SERVICE INCOME 410
Date Particulars F Debit Date Particulars F Credit2010Jun 07 GJ1 25 250
Normal Balances of the Accounts
Assets DebitContra-assets CreditLiabilities CreditContra-Liabilities DebitCapital CreditDrawing DebitIncome CreditExpenses Debit
Objective 4Trial BalanceThis refers to the summary of balances in the ledger accounts. The accounts are arranged in the order of assets, liabilities, equity, income and expenses.
PATRICE CONSULTING SERVICESTrial BalanceJuly 31, 2010
Debit Credit
Cash P 56 300Accounts Receivable 77 500
Office Supplies 2 100Prepaid Insurance 2 200Office Equipment 120 000Accounts Payable P 23 020Notes Payable 15 000Simone Patrice, Capital 172 880Simone Patrice, Drawing 2 000Consulting Fees 253 000Salaries and Wages Expense 168 200Rent Expense 11 000Transportation Expense 7 800Utilities Expense 8 200Advertising Expense 5 500Miscellaneous Expense 3 100
Totals P 463 900 P 463 900
Adapted from Workbook in Introductory Accounting for Service Business
A balanced trial balance means that journal entries are properly posted and ledger accounts are properly balanced.
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 46 – 56, 57 – 73
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.
LESSON 4FINANCIAL STATEMENT
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective (Put a Check mark)
1 Understand the procedure in preparing the income statement
2 Understand the procedures in preparing the statement of changes in owner’s equity
3 Understand the procedures in preparing the balance sheet
4 Understand the procedures in preparing the notes to the financial statements
5 Compute the missing amounts in relation to changes in capital
Objective 1Income StatementTo recall, the Income Statement presents the financial performance of the business through itsincome and expenses.
Net Income refers to the excess of income over expenses, otherwise it is called Net Loss.
There are two types of presentation for income statement.1. Natural form
a. In this presentation, income and expense accounts are grouped according tonature. Secondary income such as interest income, dividend income etc aregrouped under line item “Other Income”. On the other hand, expenses arearranged from highest to lowest, except for Miscellaneous Expense, OtherExpense and Finance Cost. These line items are the last 3 line items in the
expense section.2. Functional form
a. In this presentation, expenses are grouped according to function. The 4classification of expenses are:
i. Distribution costii. General and administrative expensesiii. Other operating expenses
iv. Finance cost
Objective 2Statement of Changes in Owner’s EquityTo recall, this component presents the changes in capital such as additional investments,withdrawals, net income and/or net loss.
The following are the effects to the capital or equity:
EFFECTS
Investment IncreaseWithdrawal DecreaseIncome IncreaseExpense DecreaseNet Income IncreaseNet Loss Decrease
The Income Statement is connected to this component through Net Income or Net Loss and thiscomponent is connected to the Balance Sheet through the Ending balance of the capital account.
The equation for computing Ending Capital Balance is
Owner, Capital – beginning + Additional Investment + Net Income-Withdrawals – Net Loss = Owner, Capital - ending
Using the accounting equation, the equation for computing Beginning Capital Balance is
Assets, beginning – Liabilities, beginning = Owner, Capital (beginning)
On the other hand, the alternative equation for Ending Capital Balance is
Assets, ending – Liabilities, ending = Owner, Capital (ending)
Objective 3Balance Sheet or Statement of Financial PositionTo recall, the Balance Sheet presents the financial condition of the business through its assets,liabilities and capital / owner’s equity
There are 2 forms of Balance Sheet:1. Account-form
a. This form presents assets on the left side and liabilities and capital on the right side
2. Report-forma. This form presents assets on the upper side and liabilities and capital on the lower
side
AssetsAssets are classified into 2:
1. Current Assetsa. These refer to assets that are useful to the business within one year. Examples are
Cash, Investment in Trading Securities, Trade and Other Receivables, Merchandise Inventory and Prepaid Expenses.
2. Noncurrent Assetsa. These refer to assets that are useful to the business for more than one year.
Examples are Property, Plant and Equipment, Long-term investments and Intangible assets.
Assets are arranged in order of liquidity. Cash is the first line item because it is the most liquidAsset.
LiabilitiesLiabilities are classified into 2:
1. Current liabilities a. These refer to liabilities that are payable and will mature within one year.
Examples are Trade and Other Payables and Current-portion of long-term notespayable.
2. Noncurrent liabilities a. These refer to liabilities that are payable and will mature beyond one year.
Examples are Noncurrent-portion of long-term notes payable, Mortgage Payable,and Bonds Payable.
Liabilities are arranged in order of maturity. For Noncurrent liabilities, the order is usually NotesPayable, Mortgage Payable and Bonds Payable. The reason is Notes Payable will normallymature first before mortagage and bonds.
Capital or Owner’s EquityThis represents the ending balance of capital from the statement of changes in owner’s equity.
Objective 4Notes to the Financial StatementsTo recall, this component presents the details of the line items in the Balance Sheet and IncomeStatement
Trade and Other ReceivablesFor this category, the first line item is Accounts Receivable followed by Allowance for DoubtfulAccounts. The difference between these two line items is called “Net Realizable Value”. Netrealizable value represents the estimated amount to be collected from the clients / customers afterdeducting doubtful accounts.
After Allowance for Doubtful Accounts, the next line item is Notes Receivable then followed byaccount titles which have the word “Receivable”. They are arranged from highest to lowest sincetheir nature are the same. “Receivable” accounts are synonymous with “Accrued Income”. Forexample, Interest receivable is the same with Accrued Interest Income.
The last line item is Advances to employees.
Prepaid ExpensesThe items for this category are arranged from highest to lowest since their nature are the same.
Property, Plant and EquipmentThe tabular presentation for this note is as follows: Cost Accumulated Net Carrying Value Depreciation
Land P 400,000 P 400,000Transportation Equipment 530,000 P30,000 500,000Building 360,000 60,000 300,000Equipment 240,000 40,000 200,000Furniture and Fixtures 110,000 10,000 100,000 ___________ ________ _________
Total P 1,640,000 P 140,000 P 1,500,000 ======== ======= =========
Adapted from the exhibits of the Workbook
The fixed asset items are arranged from highest acquisition cost to lowest acquisition cost. Thedifference between the acquisition cost and accumulated depreciation is called the Net carryingvalue or Net book value.
Trade and Other Payables
Line item1st Accounts Payable2nd Notes Payable3rd Discount on Notes Payable4th- nth Account with the word “Payable”Last Unearned income
For the 4th line item, the accounts are arranged from highest to lowest since their nature are thesame. “Payable” accounts are synonymous with “Accrued Expense”. For example, Rent payableis the same with Accrued Rent expense.
Objective 5Problems in connection to Statement of Changes in Owner’s Equity
1. A firm has just completed its first year of operations. During the year, the owner Withdrew P 50,000 and by the end of the year his equity stood at P 70,000, which Was a P 10,000 increase from his initial investment. If revenues generated during t he year totaled P 400,000, then expenses incurred during the year must have been ______________.
Owner, Capital – beginning + Additional Investments + Income– Withdrawals – Expense = Owner, Capital – ending
Expense = Owner, Capital – beginning + Additional Investments + Income– Withdrawals – Owner, Capital – ending
Solution in good accounting form
Beginning capital P 60,000Income 400,000 Withdrawals (50,000)Ending capital (70,000)Expenses P 340,000
========
2. A business had assets of P 210,000 and liabilities of P 140,000 on January 1,2008. Six months later, the assets totaled P 170,000 while outstanding debtsAmounted P 95,000. During the six-month period, the proprietor withdrew cash ofP 12,000 and supplies worth P 5,000. During the same period, he also madeadditional investments of P 24,000 cash and a second-hand equipment originallycosting P 45,000 but with a fair market value of P 20,000. The result of operationswas a ___________ of ____________.
Ending capita l P 75,000Beginning capita l (70,000)Additional investments (44,000)Withdrawals 17,000Net Loss P 22,000
========
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 21 – 24, 12 – 13
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.Created
LESSON 5STATEMENT OF CASH FLOWS
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Recall the definition of Statement of Cash Flows andclassify the transactions as operating activity, investing
activity and financing activity2 Prepare the Statement of Cash Flows and connect the
Ending cash balance to the Balance Sheet
Objective 1Statement of Cash FlowsTo recall, the Statement of Cash Flows presents the cash inflows and outflows of the businessthrough its operating, investing and financing activities.
Business Activities 1. Financing activities a. These activities pertain to transactions such as
i. Investments of the ownerii. Loans whether short term or long termiii. Withdrawal of the owneriv. Payment of the principal of the loans
2. Investing activitiesa. These activities pertain to transactions such as
i. Sale of property, plant and equipmentii. Purchase of property, plant and equipment
3. Operating activitiesa. These activities pertain to transaction such as
i. Payment of the interest of the loansii. Other transactions not enumerated above
Objective 2Connection of the Statement of Cash Flows to the Balance SheetThe ending cash balance in the Statement of Cash Flows represents the cash balance in the Balance Sheet.
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 718 – 726
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.
LESSON 6CORRECTING ENTRIES
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Know the different accounting errors
2 Prepare correcting entries
Objective 1Accounting Errors
1. Transposition errora. Error in the position of figures. Example: 123 is written as 132
2. Transplacement error / Slidea. Error in the placement of decimal point. Example: 1000.90 is written as 100.09
Objective 2Correcting journal entries
- entries to correct incorrect journal entries
On September 15, a temporary withdrawal of P 12,000 by X, the owner was recorded as a debit toSalaries and Wages Expense and a credit to Cash. The correcting entry was made at month-end.
Recorded entry
Date Particulars Debit Credit2009Sep 15 Salaries and Wages Expense 12 000
Cash 12 000Withdrawal with the owner
Correct Entry
Date Particulars Debit Credit2009Sep 15 X, Drawing 12 000
Cash 12 000Withdrawal with the owner
Correct Entry
Date Particulars Debit Credit2009Sep 30 X,Drawing 12 000
Salaries and Wages Expense 12 000Correcting Entry
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 68 – 69, 156 – 158
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.
LESSON 7PAYROLL ACCOUNTING
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective (Put a Check mark)
1 Understand the concept of employee benefits andcompensation and the related terms such as PayrollRegister and payroll deductions
2 Prepare journal entries pertaining to payroll accounting
Objective 1Employee Compensation and BenefitsOrganizations normally monitor the attendance of the employees through time clock cards. These cards show the time in and time out of the employees. Further, organizations also prepare anddistribute pay slips. These slips show the gross salary of an employee and the related deductions.
The normal deductions from the gross salary are SSS, Philhealth, Pag-IBIG, Withholding tax andCash advances.
Organizations also prepare the Payroll Register which shows the summary of the employees’ payslips.
The following is the tabular format of the Payroll Register
EmployeeName
GrossSalary
Overtime,Bonus andOtherBenefits
TotalSalary
SSS Philhealth Pag-IBIG
WithholdingTax
CashAdvance
NetSalary
AlphaBetaCharlieTOTAL
Objective 2Payroll Example and Journal Entries
Total Employee Contributions Total Employer ContributionsSSS 30,000 60,000
Philhealth 10,000 10,000Pag-IBIG 5,000 5,000
Assume Total gross salaries and wages is P 200,000, Total withholding taxes payable is P 20,000,and Total advances to employees is P 10,000
Salaries and Wages of the employees
Date Particulars Debit Credit2009Sep 30 Salaries and Wages Expense 200 000
SSS Premiums Payable 30 000 Philhealth Contributions Payable 10 000 Pag-IBIG Contributions Payable 5 000 Withholding Tax Payable 20 000 Advances to Employees 10 000 Cash 125 000Salaries and Wages of the employees
Employer Contributions
Date Particulars Debit Credit2009 SSS Premiums Expense 60 000Sep 30 Philhealth Contributions’ Expense 10 000
Pag-IBIG Contributions Expense 5 000 SSS Premium Payable 60 000 Philhealth Contributions Payable 10 000Employer Contributions 5 000
Remittances to the Government Agencies
Date Particulars Debit Credit2009 SSS Premium Payable 90 000Sep 30 Philhealth Contributions Payable 20 000
Pag-IBIG Contributions Payable 10 000Withholding Tax Payable 20 000 Cash 140 000Remittance to the government agencies
Further Readings
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
LESSON 8ACCOUNTING FOR PROMISSORY NOTES
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Understand the concept of promissory notes and its parts and prepare the journal entries in relation to issuance of promissory notes and payment on the maturity date
2 Understand the concept of discounting of customer’s note and prepare the necessary journal entries
3 Understand the concept of discounting of own note andprepare the necessary journal entries
Objective 1Promissory NotesA promissory note is an unconditional promise in writing made by one person to another, signedby the maker, engaging to pay on demand or at a fixed or determinable future time a sum certainin money to order or to bearer (Valix, 2005).
Parts of a Promissory note
March 24, 2009
I promise to pay X, P 5,000 on April 7, 2009 with 12% interest.
(Sgd) Y
1. Date of the note – March 24, 20092. Maturity date – April 7, 20093. Maker – Y4. Payee – X5. Face value / Principal – P 5,0006. Interest rate – 12%
Given the above promissory note, how much is the Maturity value?
Maturity value = Principal + Interest
Interest = Principal x Interest rate x Term / 360
Term refers to the period between the date of the note and the maturity date. 360 represents thenumber of days in a year in accordance to Banker’s rule.
In the above example the term is 14 days. 7 days in March (31-24) and 7 days in April.
For years 2000, 2004, 2008 and so on, remember that there are 29 days in February.
Interest = 5,000 x 12% x 14/360= 23
Maturity value = 5,000
Journal Entries
Date of the Note
Books of the Maker
Date Particulars Debit Credit2009Mar 24 Cash 5 000
Notes Payable 5 000Issuance of promissory note
Books of the Payee
Date Particulars Debit Credit2009Mar 24 Notes receivable 5 000
Cash 5 000Receipt of promissory note
Maturity Date
Books of the Maker
Date Particulars Debit Credit2009Apr 07 Notes payable 5 000
Interest expense 23 Cash 5 023Payment of promissory note
Books of the Payee
Date Particulars Debit Credit2009Apr 07 Cash 5 023
Notes receivable 5 000 Interest income 23Collection of principal and interest
Dishonoring of promissory noteWhen the maker fails to pay the principal and interest on the maturity date, then the promissorynote is considered dishonored. For the journal entry in the books of the maker, instead ofcrediting Cash, Accounts payable is credited. On the other hand in the books of the payee, insteadof debiting Cash, Accounts receivable is debited.
Maturity Date
Books of the Maker
Date Particulars Debit Credit2009Apr 07 Notes payable 5 000
Interest expense 23 Account payable 5 023Payment of Promissory note
Books of the Payable
Date Particulars Debit Credit2009Apr 07 Accounts receivable 5 023
Notes receivable 5 000 Interest income 23Collection of Principal and interest
Discounting of promissory notesWhen a promissory note is negotiable, the payee may obtain cash before maturity date bydiscounting the note at a bank or other financing company. To discount the note, the payee mustendorse it. Thus, legally the payee becomes an endorser and the bank becomes an endorsee(Valix, 2005).
Two types of discounting1. Discounting of customer’s note
2. Discounting of own note
Objective 2Discounting of Customer’s noteUsing the above example, assume that the maker discounted the note on April 2 at a discount rateof 15%.
The necessary equations for note discounting are as follows:
Interest on Discounting = Maturity value x Discount rate x Discount period / 360
Cash proceeds = Maturity value – Interest on discounting
Discount period refers to the period between the discount date and the maturity date.
For this example, the discount period is 5 days (April 7 – 2).
Interest on discounting = 5,023 x 15% x 5 / 360= 10
Cash proceeds = Maturity value – Interest on discounting= 5,023 – 10
= 5,013
Discount Date
Books of the Maker
Date Particular Debit Credit2009Apr 02 No journal entry
Books of the Payee
Date Particulars Debit Credit2009Apr 02 Cash 5 013
Interest expense 10 Notes receivable – discounted 5 000 Interest income 23Discounting of Note
Notes receivable – discounted is classified as a Contra-asset account and is presented as adeduction from Notes receivable
Notes receivable P xxxLess: Notes receivable – discounted xxx P xxx
On the discount date, the payee needs to inform the maker that the note is discounted. On thematurity date, the maker should directly pay to the bank or financing company.
Maturity Date
Books of the Maker
Date Particulars Debit Credit2009Apr 07 Notes payable 5 000
Interest expense 23 Account payable 5 023Payment of Promissory note
Books of the Payee
Date Particulars Debit Credit2009Apr 07 Notes receivable – discounted 5 000
Notes receivable 5 000Collection of contingent liability
Types of endorsement1. Endorsement with recourse
a. This type requires the endorser to pay the endorsee if the maker dishonors thenote. This is the contingent or secondary liability of the endorser.
2. Endorsement without recoursea. This type does not impose contingent liability on the endorser.
In the absence of any evidence to the contrary, endorsement is assumed to be with recourse(Valix, 2005).
Assume that in the above example, the maker dishonored the note and the bank charged aProtest fee of P 500.
Maturity Date
Books of the Maker
Date Particulars Debit Credit2009Apr 07 Notes payable 5 000
Interest expanse 23Miscellaneous expense 500 Accounts payable 5 523Dishonoring of note
Books of the Payee
Date Particulars Debit Credit2009Apr 07 Accounts receivable 5 523
Cash 5 523Payment of promissory note plus protest in behalf of the maker
Notes receivable –discounted 5 000 Notes receivable 5 000Cancellation of contingent liability
Principal P 5,000Interest 23Protest fees 500Total payment P 5,523
======
Objective 3
Discounting of own noteIn this type of discounting, the maker issues a promissory note to obtain cash. Interest ondiscounting is deducted in advance and is debited using the account title “Discount on NotesPayable”.
Example 1:On July 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000 note with Y.
Interest on discounting = Principal x Interest rate x Term / 360= 10,000 x 12% x 30 / 360
= 100
Discount Date
Books of the Maker
Date Particulars Debit Credit2009Jul 14 Cash 9 900
Discount on notes payable 100 Notes payable 10 000
Discounting of note
Maturity Date
Books of the Maker
Date Particulars Debit Credit2009 Notes payable 10 000Aug 13 Cash 10 000
Payment of promissory note
Interest expense 100 Discount on note payable 100Amortization of discount
Example 2:On December 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000 notewith Y. The accounting period ends on December 31.
Year-end amortization
Amortization = Discount x (Year-end date – Discount date) / Discount period= 100 x (31-14) / 30
= 57
Discount DateBooks of the Maker
Date Particulars Debit Credit2009Dec 14 Cash 9 900
Discount on notes payable 100 Notes payable 10 000
Discounting of note
Amortization at year-endBooks of the Maker
Date Particulars Debit Credit2009Dec 31 Interest expense 57
Discount of note payable 57Amortization of discount
Presentation
Notes payable P 10,000Less: Discount on notes payable 43 P 9,957
Maturity DateBooks of the Maker
Date Particulars Debit Credit2010Jan 13 Notes payable 10 000
Cash 10 000Payment of promissory note
Interest expense 43 Discount on note payable 43Amortization of discount
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 396 – 400, 473 – 474
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.
LESSON 9ACCRUED INCOME
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a check mark)
1 Understand the concept of adjusting entries and the reasons for providing adjusting entries at year-end
2 Recall the concept of accrued income and prepareadjusting entry in relation to accrued income
Objective 1Adjusting EntriesAdjusting entries refer to journal entries made at the end of the year for the following reasons:
1. Accrued incomea. There may be unrecorded income and there is a need to accrue income orrecognize receivables.
2. Accrued expensea. There may be unrecorded expenses and there is a need to accrue expenses orrecognize payables.
3. Prepaid expensea. There may be a consumed or used portion in the recorded prepaid expense orthere may be an unconsumed or unused portion in the recorded expense.
4. Unearned incomea. There may be an earned portion in the recorded unearned income or there may bean unearned portion in the recorded income.
5. Depreciationa. There is a need to provide depreciation for depreciable fixed assets.
6. Doubtful accountsa. There is a need to provide estimated doubtful accounts in relation to accountsreceivable.
Objective 2Accrued incomeTo recall, accrued income refers to income earned but not yet received. The following are theexamples of accrued income to be recognized at year-end:
1. Accrued commission incomea. It is possible that the company has already rendered the service pertaining tocommission but it has not yet received the commission as of year-end.
2. Accrued rent income
a. It is possible that the company or lessor has already earned the rent but it has notyet received the rent payment as of year-end.
3. Accounts receivablea. It is possible that the company has not yet recorded as of year-end the servicerendered.
4. Accrued interest incomea. It is possible that the company has not yet recorded the interest that is earned inrelation to notes receivable from the date of the promissory note until year-enddate.
Accrued_____________income is the same with____________ receivable. For example,accrued interest income is the same with interest receivable.
Pro-forma Entry
Date Particulars Debit CreditxxxxDec 31 _____receivable xxx
______income XxxRecognition of accrued income
Example 1:A company leases an office space for P 14,000 per month. As of December 31, 2009, company’sYear-end, the tenant has not yet paid its rent for two months.
Adjusting entry
Date Particulars Debit Credit2009Dec 31 Rent receivable 28,000
Rent income 28 000(14, 000 x 2)Recognition of accrued rent
Example 2:As of December 31, 2009, ABC Hotel has generated lodging revenue of P 127,000 from guestsWhose payments are not yet received until they check out.
Adjusting entry
Date Particulars Debit Credit2009Dec 31 Lodging receivable 127,000
Lodging income 127,000Recognition of accrued lodging
If the company did not recognize accrued income at year-end, then the financial statements willbe misstated showing understated assets and understated income
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 95 – 96, 103 – 104
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.
LESSON 10ACCRUED EXPENSE
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Recall the concept of accrued expense and prepareadjusting entry in relation to accrued expense
Objective 1Accrued expenseTo recall, accrued expense refers to expense incurred but not yet paid. The following are theexamples of accrued expense to be recognized at year-end:
1. Accrued interest expensea. It is possible that the company has not yet recorded the interest that is incurred inrelation to notes payable from the date of the promissory note until year-end date.
2. Accrued salaries and wages expensea. It is possible that as of year-end, the company has not yet paid the employeesbecause the year-end date is not the same with the payroll date.
3. Accrued rent expensea. It is possible that the company or lessee has already incurred the rent but it hasnot yet paid the rent as of year-end.
4. Accrued utilities expensea. It is possible that as of year-end, the company has not yet paid the utilities or thebilling statements of the utilities have not yet received by the company.
5. Accrued taxes and licenses expensea. It is possible that as of year-end, the company has already earned from servicesrendered and sale of goods but has not yet paid the related taxes.
Accrued________________ expense is the same with___________ payable. For example, accruedinterest expense is the same with interest payable.
Accrued expense is the opposite of accrued income. When one party recognize accrued income,the other party should recognize accrued expense.
Pro-forma Entry
Date Particulars Debit CreditxxxxDec 31 Expense Xxx
Payable XxxRecognition of accrued expense
Example 1:Property taxes for three months estimated to total P 13,300 have accrued.
Adjusting entry
Date Particulars Debit Credit2009Dec 31 Taxes and Licenses expense 13,300
Taxes and License payable 13,300Recognition of accrued taxes and licenses
Example 2:Electricity consumption for the month of December amounting to P 7,100 is not yet paid.
Adjusting entry
Date Particulars Debit Credit2009Dec 31 Utilities expense 7,100
Utilities payable 7,100Recognition of accrues utilities
If the company did not recognize accrued expense at year-end, then the financial statements willbe misstated showing understated liabilities and understated expense.
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 95 – 96, 103 – 104
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.
LESSON 11PREPAID EXPENSE
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective(Put a Check mark)
1 Recall the concept of prepare expense and prepareadjusting entry using the Asset method
2 Prepare adjusting entry using the Expense method
Prepaid expenseTo recall, prepaid expense is an asset that is paid in advance but not yet consumed or used.
Companies have two options or methods in recording prepaid items. They may use the Assetmethod or the Expense method.
Objective 1Asset Method
If the company chooses to use the Asset method, then upon purchasing the prepaid item the pro-formaentry will be:
Adjusting entry
Date Particulars Debit CreditXxxxXxx xx Prepaid______expense Xxx
Cash XxxPurchase of prepaid item
It is possible that in this recorded prepaid expense there may be consumed or used portion. Toadjust the recorded prepaid expense, the pro-forma entry will be:
top related