study guide in introductory accounting for service business
TRANSCRIPT
-
7/31/2019 Study Guide in Introductory Accounting for Service Business
1/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
1
Study Guide in
Introductory
Accounting for
Service Business
Benedick ManalaysayAccountancy Department
De La Salle University Manila
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
2/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
2
TABLE OF CONTENTS
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 38
7 Payroll Accounting 40
8 Accounting for Promissory Notes 43
9 Accrued Income 52
10 Accrued Expense 55
11 Prepaid Expense 58
12 Unearned Income 62
13 Depreciation 66
14 Doubtful Accounts 71
15 Closing Entries, Post-Closing Trial Balance 76
16 Reversing Entries 82
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
3/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
3
LESSON 1
INTRODUCTION TO ACCOUNTING
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Learn the history of accounting
2 Define accounting
3 Know the difference between bookkeeping andaccounting
4 Know the branches of accounting
5 Distinguish the forms of business organizations
according to ownership and according to activity
6 Know the role of Certified Public Accountant in thesociety
7 Know the functions of different government agencies andprofessional 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 statements
10 Explain the different basic accounting concepts or
assumptions
11 Know other terms related to basic accounting
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
4/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
4
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 andRobinson, 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 entitledSumma de Arithmetica, Geometria, Proportioni et Proportionalite, which meansEverything 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.
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 adoptmore sophisticated accounting system.
In the nineteenth century, the growth of corporations especially those in the railroad and steelindustries, 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 theinformation 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 anaid in decision-making. In making decisions, accounting is used as a tool for communication.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
5/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
5
Objective 2
Definition 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 economicinformation to permit informed judgments and decisions by users of the information.
a. Identifying this accounting process is the recognition or nonrecognition ofbusiness 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 theaccountable economic transactions and events (Valix, 2005)
c. Communicating is the process of preparing financial statements andinterpreting the results thereof
3. Accounting is the art of recording, classifying and summarizing in a significant mannerand 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 communicatesfinancial information about an identifiable economic entity.
Objective 3
Difference between Bookkeeping and Accounting
Bookkeeping Accounting
Recording of transactions Preparing financial reports
Recording of transactions Preparing financial reports Analyzing financial reports Decision-making
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
6/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
6
Objective 4
Branches of Accounting
1. Financial Accounting is primarily concerned with the recording of business transactionsand the eventual preparation of financial statements (Valix, 2005).
2. Cost Accounting is primarily concerned with proper accumulation of costs such asmaterials, labor and overhead, proper costing of inventories and study of different costing
methods.
3. Management Accounting is the preparation of financial reports and managementresearch 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 managementconsulting.
4. Taxation deals with the study of provisions of the law with regard to Philippine taxationsystem 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 anindependent party (auditor) to ascertain whether such financial statements are in
conformity with Philippine Accounting Standards.
Objective 5
Forms of Business Organizations
1. According to ownershipa. Sole-proprietorship owned by only one person called sole-proprietorb. Partnership owned by 2 or more persons called partnersc. Corporation owned by 5 or more persons called shareholders
2. According to activitya. 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 publicc. Manufacturing buys raw materials and converts them into finished goods to be
sold to the public
Objective 6
Certified Public Accountant (CPA)- is an accounting professional doing accounting, audit, tax, management consulting,
education and research work.
- Types of Accountantso Private Accountant / Management Accountant
is an accounting professional employed in a private company ororganization
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
7/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
7
o Public Accountant / Auditor is an accounting professional independent from the private organizations
and is usually employed in an auditing firm
o Government Accountant is an accounting professional employed in a government agency
o Accounting Educator and Researcher is an accounting professional employed in a university, college or
research organization
Objective 7
Government Agencies and Professional Bodies
1. Bureau of Internal Revenue (BIR) agency in charge of proper collection of taxes fromthe public
2. Securities and Exchange Commission (SEC) agency in charge of accumulating auditedfinancial statements of organizations, regulating companies issuing securities such as
stocks and bonds to the public, and monitoring companies in the insurance industry. Thisagency also facilitates the registration of partnerships and corporations.
3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines agency in chargeof regulating Philippine bank operations, setting Philippine monetary policies etc.
4. Philippine Stock Exchange (PSE) agency in charge of monitoring securitiestransactions of companies listed in the stock exchange.
5. Department of Trade and Industry (DTI) agency in charge of facilitating registration ofsole-proprietorship businesses and regulating consumer commodity transactions.
6. Commission on Audit (COA) agency in charge of auditing government-relatedtransactions7. 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 issuinglicenses to successful examinees in board exams
9. Philippine Instititute of Certified Public Accountants (PICPA) - Professional organizationof accountants in the Philippines
10.City Hall and Baranggay these political subdivisions issues business permits andcollects business taxes.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
8/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
8
Objective 8
Business Documents
1. Purchase Order shows items to be ordered by the business2. Delivery Receipt shows items to be delivered in the business3. Sales Invoice shows items that were sold to the business4. Statement of Account shows the summary of sales invoices5. Cash Voucher shows the liability of the business to be paid in the future6. 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) Componentso Balance Sheet / Statement of Financial Position
Presents the financial condition of the business through its assets,liabilities and capital / owners equity
o Income Statement Presents the financial performance of the business through its income
and expenses
o Statement of Changes in Owners Equity Presents the changes in capital such as additional investments,
withdrawals, net income and/or net loss
o Statement of Cash Flows Presents the cash inflows and outflows of the business through its
operating, investing and financing activitieso Statement of Comprehensive Income
Presents gains and losses that were not presented in the Incomestatement. Examples are Unrealized gain on sale of trading securities,Foreign exchange gain on translation etc.
o Notes to the Financial Statements Presents 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 generallyaccepted in the Philippines (Valix, 2005)
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
9/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
9
Users of the Financial Statements
Internal Users External Users
1. Management2. Employees 1. Investors2. Creditors / Lenders
3. Suppliers / Vendors4. Government5. Public
Objective 10
Basic Accounting Concepts / Assumptions
1. Entitya. 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 iscalled 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 torecognize 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.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
10/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
10
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. Comparabilitya. There are 2 kinds of comparability: Comparability within an enterprise and
Comparability 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 allowscomparisons between two or more enterprises engaged in the same industry(Valix, 2005)
10.Going Concerna. This concept assumes that business will operate indefinitely and there is no
intention of liquidating or closing down the business
11.Revenue recognitiona. Same as accrued income concept
12.Expense recognitiona. 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.Conservatisma. Under this concept, when alternatives exist, the alternative which has the leasteffect on net income or owners 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
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
11/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
11
Further Readings
Kieso, 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: 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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
12/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
12
LESSON 2
TRANSACTION 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 1
The 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 CAPITAL
Investment of the owner Investment
Withdrawal of the owner Withdrawal
Borrowed money by
issuing a promissory note
Payment of the principaland interest of the
promissory note
Interestexpense
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
13/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
13
Purchase of short-term
investment for cash
Sale of short-term
investment at a gain
Gain on sale
of investment
in tradingsecurities
Sale of short-term
investment at a loss
Loss on sale
of investment
in tradingsecurities
Cash advance to anemployee
Purchase of supplies for
cash
Purchase of supplies on
account
Purchase of a fixed asset
for cash
Purchase of a fixed asset onaccount
Partial / Full payment of
accounts payable
Sale of a fixed asset at a
gain
Gain on sale
of equipment
Sale of a fixed asset at aloss
Loss on saleof equipment
Rendered services for cash ServiceIncome
Rendered services on
account
Service
Income
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
14/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
14
Partial / Full collection of
accounts receivable
Received cash for
commission income
Commission
Income
Payment of expenses forcash
Expense
Objective 2
Types of Accounts
CATEGORY DEFINITION ACCOUNT TITLE DEFINITION /
EXAMPLES
ASSETS
CASH This includes bills
and coins, bankcheck, bank
accounts.
PETTY CASH FUND Cash used to pay
petty or smallamount of
expenses.
CASH ON HAND Cash in the
possession and
custody of the
business.
CASH IN BANK Self-explanatory
INVESTMENT IN
TRADING
SECURITIES
This refers to short-
term, highly liquid
investment insecurities such as
stocks and bonds.
TRADE AND OTHERECEIVABLES
These refer toamounts collectible
from a person or a
company
ACCOUNTSRECEIVABLE
Amount collectiblefrom clients or
customers for
services rendered orsale of goods
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
15/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
15
ALLOWANCE FOR
DOUBTFULACCOUNTS
Is a Contra-asset
account thatrepresents provision
for estimated
doubtful accounts
NOTES RECEIVABLE Same withAccounts
Receivable but isevidenced by a
promissory note
INTERESTRECEIVABLE
Amount collectiblein a loan transaction
COMMISSION
RECEIVABLE
RENT RECEIVABLE
ADVANCES TO
EMPLOYEES
Cash advance given
to employees
PREPAID EXPENSES These refer to
expenses that are
paid in advance
PREPAID RENT
PREPAID
INSURANCE
PREPAIDADVERTISING
PREPAIDSUBSCRIPTIONS
OFFICE SUPPLIES
STORE SUPPLIES
PROPERTY, PLANT
AND EQUIPMENT
These refer to items
that are useful formore than 1 year
LAND
OFFICE EQUIPMENT Computer, Fax
machine
STORE EQUIPMENT Cash register
machine
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
16/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
16
TRANSPORTATION
EQUIPMENT
Delivery Van,
Motorcycle, Cars,Trucks
FURNITURE AND
FIXTURES
Cabinets, Tables,
Chairs
MACHINERY
BUILDING Office building,Factory plant
ACCUMULATEDDEPRECIATION
Is a Contra-assetaccount that
represents
cumulative
depreciation fordepreciable fixed
assets
LIABILITIES
TRADE AND OTHER
PAYABLES
These refer to
amounts payable to
a person or a
company
ACCOUNTS
PAYABLE
Amount payable to
supplier, creditor or
vendor for money,
supplies, goods orproperty loaned
NOTES PAYABLE Same withAccounts Payable
but is evidenced by
a promissory note
DISCOUNT ON
NOTES PAYABLE
Is a Contra-liability
account that
representsunamortized
interest on the
promissory note
INTEREST PAYABLE Amount payable ina loan transaction
TAXES ANDLICENSES PAYABLE
Unpaid taxes andlicenses to be
remitted / paid to
the government
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
17/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
17
UTILITIES PAYABLE Unpaid
communication,light and water bills
SALARIES AND
WAGES PAYABLE
Unpaid salaries and
wages of the
employees
UNEARNED INCOME This refers to cash
received in advancebut not yet earned
UNEARNED RENT
UNEARNED
ADVERTISING
UNEARNED
SUBSCRIPTIONS
UNEARNEDCOMMISSION
MORTGAGEPAYABLE
This refers to bankloan with assets
such as house and
lot or vehicle ascollaterals
BONDS PAYABLE This refers to loanthat is evidenced by
a bond certificate
or indenture
CAPITAL / OWNERS EQUITY
OWNER, CAPITAL This refer to claim
or interest of the
owner
OWNER, DRAWING This refer to
temporarywithdrawal of the
owner of cash,
supplies, goods or
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
18/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
18
property
INCOME
SERVICE INCOME Income derivedfrom rendering of
services
Primary income for
service business
OTHER INCOME Secondary incomefor service business
INTEREST INCOME Income from loantransactions
DIVIDEND INCOME Income from stockinvestments
RENT INCOME
GAIN ON SALE OFEQUIPMENT
Excess of sellingprice over the net
book value of the
fixed asset
EXPENSES
EMPLOYEE BENEFIT
COST
Expenses related to
employee benefits
SALARIES AND
WAGES EXPENSE
Represents the total
gross salary or
wages of theemployees
SSS PREMIUMS
EXPENSE
Represents total
SSS (health benefit)contributions of the
employer and the
employees
PHILHEALTH
CONTRIBUTIONS
EXPENSE
Represents total
Philhealth (health
benefit)contributions of the
employer and the
employees
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
19/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
19
PAG-IBIG
CONTRIBUTIONSEXPENSE
Represents total
Pag-IBIG (housingbenefit)
contributions of the
employer and the
employees
RENT EXPENSE
PROFESSIONAL FEES Expense related to
professional
services ofaccountants,
lawyers etc
ADVERTISINGEXPENSE
COMMISSIONEXPENSE
Expense related topayment of
commission to
agents
REPAIR AND
MAINTENANCE
EXPENSE
SUPPLIES EXPENSE
INSURANCEEXPENSE
REPRESENTATION
ANDENTERTAINMENT
EXPENSE
Expense related to
cost of meetingswith clients such as
meals
TRANSPORTATIONEXPENSE
Expense related tocommuting from
the office to
clients office
FUEL AND OIL
EXPENSE
UTILITIES EXPENSE Expense related tocommunication
such as telephone,
Internet, electricityand water
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
20/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
20
TAXES ANDLICENSES EXPENSE
Expense related tobusiness taxes and
permits from the
city hall
CHARITABLECONTRIBUTION
EXPENSE
Expense related todonations
DEPRECIATION
EXPENSE
Noncash expense
that represents the
total depreciationof the depreciable
fixed assets for the
year
DOUBTFUL
ACCOUNTS EXPENSE
Noncash expense
that represents thetotal estimateddoubtful accounts
for the year
BAD DEBTSEXPENSE
Noncash expensethat represents the
total accounts
receivable thatwere written-off /
removed from the
financial books due
to its provenuncollectibility
MISCELLANEOUSEXPENSE
OTHER EXPENSE LOSS ON SALE OF
EQUIPMENT
Excess of net book
value over theselling price of the
fixed asset
FINANCE COST INTEREST EXPENSE Expense from loan
transactions
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
21/84
-
7/31/2019 Study Guide in Introductory Accounting for Service Business
22/84
-
7/31/2019 Study Guide in Introductory Accounting for Service Business
23/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
23
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 ofdry cleaning equipment with fair value of P 400,000 but with existing liability of P
100,000 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 account
7 Dry cleaning services rendered for the week totaled P 25,250 cash
GENERAL JOURNAL Page xx
Date Particulars F Debit Credit
2010
Jun 01 Cash 101 250 000
Dry Cleaning Equipment 110 400 000
Accounts Payable 210 100 000
MJ Flores, Capital 320 550 000
Investment of the owner
02 Dry Cleaning Supplies 108 22 100Accounts Payable 210 22 100
Purchase of supplies on account
04 Office Equipment 111 45 800
Cash 101 13 470
Accounts Payable 210 32 060
Purchase of cash register
07 Cash 101 25 250
Dry Cleaning Service Income 410 25 250
Rendered 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.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
24/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
24
Objective 3
PostingThis 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. Thefollowing is a typical example of chart of accounts.
ASSETS 100 OWNERS EQUITY 300
Cash 101 MJ Flores, Drawing 310
Investment in Trading Securities 102 MJ Flores, Capital 320
Accounts Receivable 103
Allowance for Doubtful Accounts 104
Notes Receivable 105 INCOME 400
Advances to Employees 106
Prepaid Rent 107 Dry Cleaning Service Income 410
Dry Cleaning Supplies 108 Interest Income 420
Land 109
Dry Cleaning Equipment 110
Office Equipment 111 EXPENSES 500
Building 120
Accumulated Depreciation Dry Cleaning Equipment
130 Salaries and Wages Expense 510
Accumulated Depreciation
Office Equipment
131 Rent Expense 520
Accumulated Depreciation Building 140 Advertising Expense 530Commission Expense 540
LIABILITIES 200 Dry Cleaning Supplies Expense 550
Insurance Expense 560
Accounts Payable 210 Transportation Expense 570
Notes Payable 220 Utilities Expense 580
Discount on Notes Payable 230 Taxes and Licenses Expense 590
Unearned Advertising 240 Depreciation Expense 591
Mortgage Payable 250 Interest Expense 592
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
25/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
25
General Ledger Postings
CASH 101
Date Particulars F Debit Date Particulars F Credit
2010 2010Jun 01 GJ1 250 000 Jun 04 GJ1 13 470
07 GJ1 25 250
Totals 275 250 13 470
Balance 261 780
DRY CLEANING SUPPLIES 108
Date Particulars F Debit Date Particulars F Credit
2010
Jun 02 GJ1 22 100
DRY CLEANING EQUIPMENT 110
Date Particulars F Debit Date Particulars F Credit
2010
Jun 01 GJ1 400 000
OFFICE EQUIPMENT 111
Date Particulars F Debit Date Particulars F Credit
2010
Jun 04 GJ1 45 800
ACCOUNTS PAYABLE 210
Date Particulars F Debit Date Particulars F Credit
2010
Jun 01 GJ1 100 00002 GJ1 22 100
04 GJ1 32 060
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
26/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
26
MJ FLORES, CAPITAL 320
Date Particulars F Debit Date Particulars F Credit
2010
Jun 01 GJ1 550 000
DRY CLEANING SERVICE INCOME 410
Date Particulars F Debit Date Particulars F Credit
2010
Jun 07 GJ1 25 250
Normal Balances of the Accounts
Assets Debit
Contra-assets Credit
Liabilities Credit
Contra-liabilities Debit
Capital Credit
Drawing Debit
Income Credit
Expenses Debit
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
27/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
27
Objective 4
Trial 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 SERVICES
Trial BalanceJuly 31, 2010
Debit Credit
Cash P 56 300
Accounts Receivable 77 500
Office Supplies 2 100
Prepaid Insurance 2 200
Office Equipment 120 000
Accounts Payable P 23 020
Notes Payable 15 000
Simone Patrice, Capital 172 880
Simone Patrice, Drawing 2 000
Consulting Fees 253 000
Salaries and Wages Expense 168 200
Rent Expense 11 000
Transportation Expense 7 800
Utilities Expense 8 200
Advertising Expense 5 500
Miscellaneous 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 areproperly balanced.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
28/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
28
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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
29/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
29
LESSON 4
FINANCIAL STATEMENTS
Study ObjectivesAfter studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Understand the procedures in preparing the incomestatement
2 Understand the procedures in preparing the statement of
changes in owners equity
3 Understand the procedures in preparing the balance sheet
4 Understand the procedures in preparing the notes to thefinancial statements
5 Compute the missing amounts in relation to changes incapital
Objective 1
Income StatementTo recall, the Income Statement presents the financial performance of the business through its
income 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 forma. In this presentation, income and expense accounts are grouped according to
nature. Secondary income such as interest income, dividend income etc are
grouped under line item Other Income. On the other hand, expenses are
arranged from highest to lowest, except for Miscellaneous Expense, Other
Expense and Finance Cost. These line items are the last 3 line items in theexpense section.
2. Functional forma. In this presentation, expenses are grouped according to function. The 4
classification of expenses are:i. Distribution cost
ii. General and administrative expensesiii. Other operating expensesiv. Finance cost
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
30/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
30
Objective 2
Statement of Changes in Owners 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 Increase
Withdrawal Decrease
Income Increase
Expense Decrease
Net Income Increase
Net Loss Decrease
The Income Statement is connected to this component through Net Income or Net Loss and this
component 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 Investments + 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)
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
31/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
31
Objective 3
Balance Sheet or Statement of Financial PositionTo recall, the Balance Sheet presents the financial condition of the business through its assets,
liabilities and capital / owners equity
There are 2 forms of Balance Sheet:
1. Account-forma. This form presents assets on the left side and liabilities and capital on the right
side2. Report-form
a. This form presents assets on the upper side and liabilities and capital on the lowerside
Assets
Assets 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 Assets
a. These refer to assets that are useful to the business for more than one year.Examples are Property, Plant and Equipment, Long-term investments andIntangible assets.
Assets are arranged in order of liquidity. Cash is the first line item because it is the most liquid
asset.
Liabilities
Liabilities are classified into 2:
1. Current liabilitiesa. 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 liabilitiesa. 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 Notes
Payable, Mortgage Payable and Bonds Payable. The reason is Notes Payable will normally
mature first before mortagage and bonds.
Capital or Owners Equity
This represents the ending balance of capital from the statement of changes in owners equity.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
32/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
32
Objective 4
Notes to the Financial StatementsTo recall, this component presents the details of the line items in the Balance Sheet and Income
Statement
Trade and Other ReceivablesFor this category, the first line item is Accounts Receivable followed by Allowance for Doubtful
Accounts. 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 after
deducting doubtful accounts.
After Allowance for Doubtful Accounts, the next line item is Notes Receivable then followed by
account titles which have the word Receivable. They are arranged from highest to lowest since
their nature are the same. Receivable accounts are synonymous with Accrued Income. For
example, Interest receivable is the same with Accrued Interest Income.
The last line item is Advances to employees.
Prepaid Expenses
The items for this category are arranged from highest to lowest since their nature are the same.
Property, Plant and Equipment
The tabular presentation for this note is as follows:
Cost Accumulated
Depreciation
Net Carrying Value
Land P 400,000 P 400,000Transportation Equipment 530,000 P 30,000 500,000
Building 360,000 60,000 300,000Equipment 240,000 40,000 200,000
Furniture 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. The
difference between the acquisition cost and accumulated depreciation is called the Net carryingvalue or Net book value.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
33/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
33
Trade and Other Payables
Line Item
1st Accounts Payable
2nd Notes Payable
3rd
Discount on Notes Payable
4th 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 payable
is the same with Accrued Rent expense.
Objective 5
Problems in connection to Statement of Changes in Owners Equity
1. A firm has just completed its first year of operations. During the year, the ownerwithdrew P 50,000 and by the end of the year his equity stood at P 70,000, whichwas a P 10,000 increase from his initial investment. If revenues generated during
the 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 60,000
Income 400,000
Withdrawals (50,000)Ending capital (70,000)
Expenses P 340,000
========
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
34/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
34
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 debts
amounted 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 made
additional investments of P 24,000 cash and a second-hand equipment originally
costing P 45,000 but with a fair market value of P 20,000. The result of operationswas a ___________ of ____________.
Ending capital P 75,000
Beginning capital (70,000)Additional investments (44,000)
Withdrawals 17,000
Net Loss P 22,000========
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
35/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
35
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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
36/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
36
LESSON 5
STATEMENT 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 activity
2 Prepare the Statement of Cash Flows and connect theEnding cash balance to the Balance Sheet
Objective 1
Statement 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 Activities1. Financing activities
a. These activities pertain to transactions such asi. Investments of the owner
ii. 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 theBalance Sheet.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
37/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
37
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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
38/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
38
LESSON 6
CORRECTING 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 1
Accounting Errors1. Transposition error
a. Error in the position of figures. Example: 123 is written as 1322. Transplacement error / Slide
a. Error in the placement of decimal point. Example: 1000.90 is written as 100.09Objective 2
Correcting 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 to
Salaries and Wages Expense and a credit to Cash. The correcting entry was made at month-end.
Recorded entry
Date Particulars Debit Credit
2009
Sep 15 Salaries and Wages Expense 12 000
Cash 12 000
Withdrawal of the owner
Correct entry
Date Particulars Debit Credit
2009
Sep 15 X, Drawing 12 000
Cash 12 000
Withdrawal of the owner
Correcting Entry
Date Particulars Debit Credit
2009
Sep 30 X, Drawing 12 000
Salaries and Wages Expense 12 000
Correcting entry
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
39/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
39
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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
40/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
40
LESSON 7
PAYROLL 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 Payroll
Register and payroll deductions
2 Prepare journal entries pertaining to payroll accounting
Objective 1
Employee 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 pay
slips.
The following is the tabular format of the Payroll Register
Employee
Name
Gross
Salary
Overtime,
Bonus and
Other
Benefits
Total
Salary
SSS Philhealth Pag-
IBIG
Withholding
Tax
Cash
Advance
Net
Salary
Alpha
Beta
Charlie
TOTAL
Objective 2
Payroll Example and Journal Entries
Total Employee Contributions Total Employer ContributionsSSS 30,000 60,000
Philhealth 10,000 10,000
Pag-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
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
41/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
41
Salaries and Wages of the employees
Date Particulars Debit Credit
2009
Sep 30 Salaries and Wages Expense 200 000SSS 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 125 000
Salaries and Wages of the employees
Employer Contributions
Date Particulars Debit Credit2009 SSS Premiums Expense 60 000
Sep 30 Philhealth Contributions Expense 10 000
Pag-IBIG Contributions Expense 5 000
SSS Premiums Payable 60 000
Philhealth Contributions Payable 10 000
Pag-IBIG Contributions Payable 5 000
Employer Contributions
Remmittance to the government
agencies
Date Particulars Debit Credit2009 SSS Premiums Payable 90 000
Sep 30 Philhealth Contributions Payable 20 000
Pag-IBIG Contributions Payable 10 000
Withholding Tax Payable 20 000
Cash 140 000
Remmittance to the government
agencies
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
42/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
42
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: 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.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
43/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
43
LESSON 8
ACCOUNTING 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 partsand prepare the journal entries in relation to issuance of
promissory notes and payment on the maturity date
2 Understand the concept of discounting of customers noteand prepare the necessary journal entries
3 Understand the concept of discounting of own note andprepare the necessary journal entries
Objective 1
Promissory NotesA promissory note is an unconditional promise in writing made by one person to another, signed
by 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?
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
44/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
44
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 Bankers 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 Credit
2009
Mar 24 Cash 5 000Notes payable 5 000
Issuance of promissory note
Books of the Payee
Date Particulars Debit Credit
2009
Mar 24 Notes receivable 5 000
Cash 5 000
Receipt of promissory note
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
45/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
45
Maturity Date
Books of the Maker
Date Particulars Debit Credit
2009
Apr 07 Notes payable 5 000
Interest expense 23
Cash 5 023
Payment of promissory note
Books of the Payee
Date Particulars Debit Credit
2009
Apr 07 Cash 5 023
Notes receivable 5 000
Interest income 23Collection of principal and interest
Dishonoring of promissory note
When 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 of
crediting Cash, Accounts payable is credited. On the other hand in the books of the payee, instead
of debiting Cash, Accounts receivable is debited.
Maturity Date
Books of the Maker
Date Particulars Debit Credit
2009
Apr 07 Notes payable 5 000
Interest expense 23
Accounts payable 5 023
Payment of promissory note
Books of the Payee
Date Particulars Debit Credit2009
Apr 07 Accounts receivable 5 023
Notes receivable 5 000
Interest income 23
Collection of principal and interest
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
46/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
46
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 must
endorse it. Thus, legally the payee becomes an endorser and the bank becomes an endorsee
(Valix, 2005).
Two types of discounting1. Discounting of customers note2. Discounting of own note
Objective 2
Discounting of Customers noteUsing the above example, assume that the maker discounted the note on April 2 at a discount rate
of 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
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
47/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
47
Discount Date
Books of the Maker
Date Particulars Debit Credit
2009
Apr 02 No journal entry
Books of the Payee
Date Particulars Debit Credit
2009
Apr 02 Cash 5 013
Interest expense 10
Notes receivable discounted 5 000
Interest income 23
Discounting of note
Notes receivable discounted is classified as a Contra-asset account and is presented as adeduction from Notes receivable
Notes receivable P xxx
Less: Notes receivable discounted xxx P xxx
On the discount date, the payee needs to inform the maker that the note is discounted. On the
maturity date, the maker should directly pay to the bank or financing company.
Maturity Date
Books of the Maker
Date Particulars Debit Credit
2009
Apr 07 Notes payable 5 000
Interest expense 23
Cash 5 023
Payment of promissory note
Books of the Payee
Date Particulars Debit Credit
2009
Apr 07 Notes receivable discounted 5 000
Notes receivable 5 000
Cancellation of contingent liability
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
48/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
48
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 a
protest fee of P 500.
Maturity Date
Books of the Maker
Date Particulars Debit Credit
2009
Apr 07 Notes payable 5 000
Interest expense 23
Miscellaneous expense 500
Accounts payable 5 523
Dishonoring of note
Books of the Payee
Date Particulars Debit Credit
2009
Apr 07 Accounts receivable 5 523
Cash 5 523
Payment of promissory note plus
protest fees in behalf of the maker
Notes receivable discounted 5 000
Notes receivable 5 000
Cancellation of contingent liability
Principal P 5,000Interest 23
Protest fees 500
Total payment P 5,523======
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
49/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
49
Objective 3
Discounting of own noteIn this type of discounting, the maker issues a promissory note to obtain cash. Interest on
discounting is deducted in advance and is debited using the account title Discount on Notes
Payable.
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 Credit
2009
Jul 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 Credit
2009
Aug 13 Notes payable 10 000
Cash 10 000
Payment of promissory note
Interest expense 100
Discount on note payable 100
Amortization of discount
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
50/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
50
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 Date
Books of the Maker
Date Particulars Debit Credit
2009
Dec 14 Cash 9 900Discount on notes payable 100
Notes payable 10 000
Discounting of note
Amortization at year-end
Books of the Maker
Date Particulars Debit Credit
2009
Dec 31 Interest expense 57
Discount on note payable 57
Amortization of discount
Presentation
Notes payable P 10,000
Less: Discount on notes payable 43 P 9,957
Maturity Date
Books of the Maker
Date Particulars Debit Credit
2010Jan 13 Notes payable 10 000
Cash 10 000
Payment of promissory note
Interest expense 43
Discount on note payable 43
Amortization of discount
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
51/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
51
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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
52/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
52
LESSON 9
ACCRUED 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 thereasons for providing adjusting entries at year-end
2 Recall the concept of accrued income and prepare
adjusting entry in relation to accrued income
Objective 1
Adjusting 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 or
recognize receivables.2. Accrued expense
a. 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 or
there 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 be
an 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 accounts
receivable.
Objective 2
Accrued income
To 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 to
commission but it has not yet received the commission as of year-end.
2. Accrued rent income
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
53/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
53
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 service
rendered.
4. Accrued interest incomea. It is possible that the company has not yet recorded the interest that is earned in
relation to notes receivable from the date of the promissory note until year-end
date.
Accrued income is the same with receivable. For example,
accrued interest income is the same with interest receivable.
Pro-forma Entry
Date Particulars Debit Credit
xxxx
Dec 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, companys
year-end, the tenant has not yet paid its rent for two months.
Adjusting entry
Date Particulars Debit Credit
2009
Dec 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 guests
whose payments are not yet received until they check out.
Adjusting entry
Date Particulars Debit Credit
2009Dec 31 Lodging receivable 127,000
Lodging income 127,000
Recognition of accrued lodging
If the company did not recognize accrued income at year-end, then the financial statements will
be misstated showing understated assets and understated income.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
54/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
54
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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
55/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
55
LESSON 10
ACCRUED 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 1
Accrued 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 in
relation 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 employees
because 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 has
not yet paid the rent as of year-end.4. Accrued utilities expense
a. 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 services
rendered and sale of goods but has not yet paid the related taxes.
Accrued expense is the same with payable. For example, accrued
interest 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 Credit
Xxxx
Dec 31 _____ expense xxx
_____ payable xxx
Recognition of accrued expense
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
56/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
56
Example 1:
Property taxes for three months estimated to total P 13,300 have accrued.
Adjusting entry
Date Particulars Debit Credit
2009Dec 31 Taxes and Licenses expense 13,300
Taxes and Licenses payable 13,300
Recognition of accrued taxes andlicenses
Example 2:
Electricity consumption for the month of December amounting to P 7,100 is not yet paid.
Adjusting entry
Date Particulars Debit Credit
2009
Dec 31 Utilities expense 7,100
Utilities payable 7,100
Recognition of accrued utilities
If the company did not recognize accrued expense at year-end, then the financial statements will
be misstated showing understated liabilities and understated expense.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
57/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
57
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 104 108
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). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
58/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
58
LESSON 11
PREPAID 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 Asset
method or the Expense method.
Objective 1
Asset Method
If the company chooses to use the Asset method, then upon purchasing the prepaid item the pro-
forma entry will be:
Date Particulars Debit Credit
xxxx
xxx xx Prepaid _____ expense xxx
Cash xxx
Purchase of prepaid item
It is possible that in this recorded prepaid expense there may be consumed or used portion. To
adjust the recorded prepaid expense, the pro-forma entry will be:
Date Particulars Debit Credit
zxxx
Dec 31 _____ expense xxx
Prepaid _____ expense xxx
Recognition of consumed or usedportion of the recorded prepaid
expense
Created with novaPDF Printer (www.novaPDF.com). Please register to remove this message.
http://www.novapdf.com/http://www.novapdf.com/ -
7/31/2019 Study Guide in Introductory Accounting for Service Business
59/84
Confidentiality RequirementThis material is prohibited for reproduction or distribution without prior consent from the author.
59
Example:
On March 15, 2009, XYZ Company purchased office supplies for cash, P 100,000. At the end ofthe year, record shows that 25% worth of supplies have been used.
Date Particulars Debit Credit
2009
Mar 15 Office supplies 100,000Cash 100,000
Purchase of prepaid item
Adjusting entry
Date Particulars Debit Credit
2009
Dec 31 Office supplies expense 25,000
Office supplies 25,000
Recognition of used portion of the
recorded office supplies
If the prepaid expense account is not adjusted at year-end, then the financial statements will be
misstated showing overstated assets and understated expenses.
If the adjusted Office supplies of P 75,000 is fully consumed in the following year, then the entire
P 75,000 will be transformed to Office supplies expense also in the following year.
Objective 2