ACCOUNTING TUTORIAL (ENGLISH)

MEANING OF BUSINESS
Business is an undertaking whereby one sells goods or services in exchange for money or its equivalent.

From this definition one would understand that basically the motive of business is to earn profit. The
profit of the business is the measure of its success in its operations. As profit increases, the business is
able to survive in the industry, as a consequence it could expand its operations, raise the standards of
living of the owner or owners and even the labor force, and it could contribute to the country's
economic state through payment of taxes.
FORMS OF BUSINESS ORGANIZATION

The forms of business organization are:

1. Sole Proprietorship - "sole" means one, hence only one person owns this type of business
organization. The owner controls all the operations and management of the business. All the profits
will go to the owner himself and in the event of losses he will solely suffer. This type of business is
established for simple and small businesses, which need small capital to survive.

Example: Beauty Salon, Dress Shops, and Sari-sari Store

2. Partnership - is the type of business organization whereby a contract or agreement is made by two or
more persons who bind themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves. The owners are called partners. They
contribute capital and divide profits for themselves. There is no prohibition on the maximum number of
partners that may constitute a partnership. Obviously, this type must be organized by at least two (2)
persons.

Example: Consultancy firm, Law firm, Accounting firm, Auditing firm

3. Corporation - is an artificial being created by operation of law, having the rights of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence . The
corporation is a juridical entity, i.e., created by virtue of law, separate from the owners who are called
the stockholders. Hence, it is the corporation which enters into a contract, sue and being sued,
responsible to all its obligations and earns profits or suffers losses.

Example: San Miguel Corporation, RFM Corporation, and Sara Lee Philippines, Inc. Unilever Philippines,
Inc.

4. Cooperative - is a business organization owned by a group of individuals and is operated for their
mutual benefit. The persons making up the group are called members. Cooperatives may be
incorporated or unincorporated.

Examples: Water and electricity (utility) cooperatives, Cooperative banking, Credit unions, and Housing
cooperatives.
TYPES OF BUSINESS OPERATIONS

1. Service Business - an undertaking for profit whereby one renders service to a client or customer for a
fee.

Examples: schools, airlines, parlors, barbershops, repair services, exercise of professions like
accountancy, consultancy, counseling and law.

2. Merchandising Business - is also known as "Trading" business, which means that goods or
merchandise, are bought then sold to the customers for profit.

Examples: bookstore, SM Department Stores, Drug Stores

3. Manufacturing Business - the type of business operation whereby raw materials are processed into
finished product, then sells the finished products for a price higher than the cost in order to earn profit.

Examples: shoe factory, Unilever Philippines, Inc., Procter and Gamble Phils., soap factory and the like.

DEFINITIONS OF ACCOUNTING

- Accounting is a service activity. Its function is to provide quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions. (Financial
Reporting Standard Council)

- Accounting is the art of recording, classifying, summarizing in a significant manner and in terms of
money, transactions, and events which are in part at least of a financial nature, and interpreting the
result thereof. (American Institute of Certified Public Accountants)

- Accounting is the art of measuring, communicating, and interpreting the financial activity of a business.

From the above definitions of accounting the student must understand that accounting is both a process
and an art. Its ultimate objective is to provide the users of financial information that may be used in
their decision making.

THE ROLE OF ACCOUNTING IN BUSINESS

The functions of accounting in business are very important because of the need to make business
decisions. Before the management of a business can arrive at a reasonable and effective decision, it
needs financial information regarding the business operations and its results for a period of time and its
financial position as of a given date. Likewise, other users of financial information will rely on the
financial report in almost all their undertakings concerning the business. Some of these undertakings
are the investments of prospective owners, credit standing evaluation, registration with government
agencies and payment of taxes.
Because of essential role of accounting in measuring the standing of the business whether it is viable or
not, earning or losing, capable of expansion or susceptible to closure and etc., accounting is
acknowledged as the language of business.
BUSINESS TRANSACTIONS
Business transaction refers to activity or event taking place in business, which is expressed in terms of
money. The business transactions are economic activities that are measured and finally reported by
accountants through financial reports or statements.
BASIC FINANCIAL STATEMENTS
1. Income Statement / Statement of Comprehensive Income
2. Statement of Changes in Equity
3. Balance Sheet / Statement of Financial Position
4. Statement of Cash Flows
5. Notes to Financial Statements

ELEMENTS OF ACCOUNTING

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

THE BASIC ACCOUNTING EQUATION

The basic or the fundamental accounting equation is as follows:

ASSETS = LIABILITIES + OWNER'S EQUITY

This formula presents assets as equal in value to the sum of liabilities and the owner's equity. The
elements of the accounting equation are discussed as follows:

1. ASSETS - are resources controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise.

Requirements in recognition of an ASSET:

a. It is probable that the future economic benefits will flow to the enterprise

b. The asset has a cost or value that can be measured reliably.

Examples of Assets: Cash, Accounts Receivables, Office Supplies, Tools and Equipment, Vehicle, Land and
Building

2. LIABILITIES - is a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic
benefits.
Requirements in recognition of a LIABILITY:

a. It is probable that an outflow of resources embodying economic benefits will result from the
settlement of a present obligation.

b. The amount at which the settlement will take place can be measured reliably.

Examples of Liabilities: Accounts Payable, Notes Payable, Mortgage Payable, Loans Payable

How may a liability be settled?

- by payment of cash
- by transfer of non-cash asset
- by providing service/s

3. OWNER'S EQUITY - the interest of an owner in an enterprise, which is the excess of an enterprise's
assets over its liabilities. Mathematically, owner's equity can be computed as:

ASSETS - LIABILITIES = OWNER’S EQUITY

The owner's equity represents the residual interest of the owner over the enterprise or business's
economic resources after deducting economic obligations. It is the interest of those who bear the
ultimate risks and uncertainties and receive the ultimate benefits of enterprise operations.

ECONOMIC RESOURCES - ECONOMIC OBLIGATIONS = "RESIDUAL INTEREST"

4. INCOME - are increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants. In the service type business operation which is the
major concern of this course, Accounting 1, the revenue recognized is termed as "Service Income". The
earnings (revenues) of a service business is generated upon the rendering of services for a fee. Other
service entities used the general term "Professional Fees" to denote income received from rendering
professional services to a client.
5. EXPENSES - are decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
COMPONENTS OF FINANCIAL STATEMENTS

1. Income Statement - shows the changes in the financial position of the company. It shows the results
of operation of the business or enterprise for a period of time. It presents the revenue, expenses, gains,
losses, and net income or net loss recognized during the period. It reflects the profitability of the
business.
The Income Statement reflects the elements that are directly related to the performance, these are the
income and expenses.

Net Income (Net Loss) - the excess (deficit) of revenue over expenses for an accounting period.

REVENUE - EXPENSES = NET INCOME (NET LOSS)

1.) If Revenue > Expenses = Net Income

2.) If Revenue < Expenses = Net loss

2. Statement of Changes in Equity - shows the additional investments made by the owners or
stakeholders, as well as their withdrawals for the period. It complements the balance sheet by showing
the changes in financial position, and the income statement by describing the total changes in owner's
equity during the period.

The Statement of Changes in Equity serves as a proof of the amount of equity appearing in the Balance
Sheet.

3. Balance Sheet - shows the financial position of the company. The financial position of an enterprise is
affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its
capacity to adapt to changes in the environment in which it operates. It presents three (3) major
categories:

a) Assets
b) Liabilities, and
c) Owner's Equity.

It presents the financial status of business or enterprise at a particular point in time.

The Balance Sheet reflects the elements that are directly related to financial position, these are the
assets, liabilities and owner’s equity.

4. Statement of Cash Flows - provides information in assessing how well the enterprise is able to
generate cash and cash equivalents and how it uses those cash flows. It analyses changes in cash and
cash equivalents during a period. It has three categories of information: operating, investing and
financing activities.

"Operating activities" are the main revenue-producing activities of the enterprise that are not investing
or financing activities and includes cash received from customers and cash paid to suppliers and
employees.

"Investing activities" are the acquisition and disposal of long-term assets and other investments that are
not considered to be cash equivalents.
"Financing activities" are activities that alter the equity capital and borrowing structure of the
enterprise.

The Statement of Cash Flow serves as a proof of the amount of cash appearing in the Balance Sheet.

5. Notes to Financial Statement - explains the items in the four financial statements above and
discloses any information that does not qualify for presentation in the balance sheet and income
statement. These may also be in the form of supplementary schedules and other information that,
(a) explains items in the balance sheet and income statement,
(b) discloses the risks and uncertainties affecting the enterprise, and
(c) explains any resources and obligations not recognized in the balance sheet .

DOUBLE-ENTRY BOOKKEEPING

In accounting each transaction affects at least two items in the financial accounting records. The double
entry system of recording is based on this principle of duality.

ILLUSTRATION OF DOUBLE-ENTRY SYSTEM IN CONSONANCE WITH THE BASIC ACCOUNTING EQUATION

The effects of each accounting transaction in the basic accounting equation may be any of the following:

ASSETS = LIABILITIES + OWNER'S EQUITY

1. ⬆⬇ = no effect + no effect

2. ⬆ = ⬆ + no effect

3. ⬆ = no effect+ ⬆

4. ⬇ = no effect+ ⬇

5. no effect= ⬆⬇ + no effect

6. no effect = ⬆ + ⬇

7. no effect= ⬇ + ⬆

8. no effect= no effect+ ⬆⬇

Note that each transaction affects at least two items in the equation (all items may be affected) and the
combination varies. These notwithstanding, the equality of the equation must be maintained always. In
accounting, when the "equality" is maintained it is said to be in "balance".
SUMMARY OF THE EFFECTS OF TRANSACTIONS TO THE ELEMENTS OF THE FINANCIAL STATEMENTS
INCREASES IN ASSETS ARISE FROM:

1) exchanges in which assets are acquired,

2) investments of assets in the enterprise by owners,

3) nonreciprocal transfers of assets to an enterprise by other than owners,

4) shifts of costs to different asset categories in production, and occasionally,

5) increases in amounts ascribed to produced assets.

- Increases in assets sometimes arise from external events other than transfers.
- In exchanges asset increases may be accompanied by decreases in other assets (e.g., purchase for
cash), increases in liabilities (e.g., purchase on account), or recognition of revenue (e.g., sale for cash,
service for cash)

DECREASES IN ASSETS ARISE FROM:

1) exchanges in which assets are disposed of,

2) withdrawals of assets from the enterprise,

3) nonreciprocal transfers of assets from the enterprise other than to owners,

4) certain external events other than transfers that reduce the market price or utility of assets,

5) shifts or allocations of costs of different asset categories or to expenses in production, and

6) casualties
- In exchanges, asset decreases may be accompanied by increases in other assets (e.g., a purchase for
cash), decreases in liabilities (e.g., payment of debt), or increases in expenses.

INCREASES IN LIABILITIES ARISE FROM:

1) exchanges in which liabilities are incurred,

2) transfers between an enterprise and its owners,

3) nonreciprocal transfers with other than owners in which liabilities arise.

- In exchanges, liabilities increases may be accompanied by decreases in other liabilities (e.g., a note
given on an account payable), increases in assets (e.g., purchase on account), or an expense (e.g.,
officers salaries incurred but unpaid).
DECREASES IN LIABILITIES ARISE FROM:

1) exchanges in which liabilities are reduced,

2) transfers between an enterprise and its owners (e.g., debt converted into capital stock),

3) nonreciprocal transfers with other than owners in which liabilities are reduced (e.g., forgiveness of
indebtedness)
- In exchanges, liability decreases may be accompanied by increases in other liabilities (e.g., a note given
on an account payable), or revenue (e.g., goods delivered or services rendered to satisfy a customer
prepayment).

INCREASES IN OWNER'S EQUITY ARISE FROM:

1) investments in an enterprise by its owners,

2) the net result of all revenue and expenses recognized during a period (net income)

3) nonreciprocal transfers to an enterprise from other than owners (e.g., gifts and donations), and

4) external events other than transfers (e.g., revaluation of property, plant and equipment)

DECREASES IN OWNER'S EQUITY ARISE FROM:

1) transfers from an enterprise to its owners,

2) net losses for a period.

REVENUE ARISES FROM:

1) exchanges accompanied by increases in assets

2) exchanges accompanied by decreases in liabilities (e.g., unearned revenue)

EXPENSES ARISE FROM:

1) exchanges

2) nonreciprocal transfers with other than owners,

3) external events other than transfers,

4) production
5) casualties

ASSETS

"CURRENT ASSETS" are cash; cash equivalent; assets held for collection, sale, or consumption within the
enterprise's normal operating cycle; or assets held for trading within the next 12 months . All other
assets are "NONCURRENT ASSETS". The current assets are presented in the order of "liquidity".
Liquidity means the characteristic of an asset to be easily converted into cash.

CURRENT ASSETS

1. Cash on Hand - refers to coins, currencies, bank drafts, and customer's checks awaiting deposits that
are kept in a safe deposit box or in a cash box within the enterprise. These cash items must be available
for use in the current operations.

2. Cash in Bank - money deposited in a bank which may be a savings or demand deposits.

3. Accounts Receivable - consist of open accounts with customers for uncollected revenues, unbilled
services already rendered or accrued as long as the revenue has been earned.

4. Allowance for Bad debts - also termed as "Allowance for Doubtful Accounts". This is a contra-asset
account that is deducted from a principal asset account which is accounts receivable. All the
outstanding accounts from the customers are not certain to be collected fully, hence the business
usually provide for uncollectible portion of the accounts receivable as bad debts or doubtful accounts.

Accounts Receivable P xxx

Less: Allowance for Bad Debts (xxx)
Net Realizable Value P xxx

5. Notes Receivables - are collectible amounts from the customer that are supported by written formal
promises to pay a certain amount on demand or at a certain future time.

6. Office Supplies Unused - refers to the portion of office supplies purchased that are still capable of
utilization by the enterprise in the immediately succeeding accounting period. This is classified as
"prepayments" or "prepaid expense" because the cost has already been paid and has future benefits.

7. Prepaid Rent - refers to advance rental payment/s that will benefit the business.

NONCURRENT ASSETS

PROPERTY, PLANT AND EQUIPMENT- include all tangible assets with an estimated useful life beyond one
year, are used in the conduct of the business, and are not intended for sale in the ordinary course of
business. Property, plant and equipment are generally carried at cost less allowance for depreciation.
1. LAND - is an asset that is not subject to depreciation. It appreciates (value increases) as time goes by.

2. Office Equipment - refers to tangible assets that are to be used by the business in the office like
computers, typewriters, facsimile, and the like. These assets must be for use by the business for a period
of time beyond one year.

3. Accumulated Depreciation - Office Equipment - refers to the accumulated portion of the cost of the
equipment that has already of service to the company. All property, plant and equipment accounts
except land are subject to depreciation.

Depreciation is the systematic allocation of the cost of the depreciable asset over its useful life.
Accumulated depreciation account is a contra-asset account because it is deducted from the cost of
Depreciable asset in order to get the Net Book Value.

Office Equipment P xxx

Less: Acc. Depreciation - Office Equipment ( xxx)
NET BOOK VALUE P xxx

4. Office Furniture - refers to tangible assets that are necessary furnishings of an office such as office
tables, chairs, counters, and cabinets.

5. Accumulated Depreciation - Office Furniture - is a contra - asset account that is deducted from the
cost of Office Furniture. It represents the expired allocated cost that already served the enterprise.

6. Building - can be acquired by PURCHASE or by means of CONSTRUCTION. Construction costs may

include materials, labor, overhead, permit or license, Architect fee, Excavation cost, etc.

7. Accumulated Depreciation - Building - refers to the accumulated portion of the cost of the building
that has already of service to the company.
LIABILITIES

CURRENT LIABILITIES are those to be settled within the enterprise's normal operating cycle or due
within 12 months, or those held for trading, or those for which the entity does not have an
unconditional right to defer payment beyond 12 months. Other liabilities are NONCURRENT LIABILITIES.

1. Accounts Payable - liability representing the amount owed to a creditor usually arising from the
purchase of goods, materials or supplies.

2. Notes Payable - a liability evidenced by a formal promise to pay written in a note.

3. Unearned Service Fees - payments for services that are received in advance from the client's but the
enterprise or business has not yet rendered the services.
4. Salaries Payable - obligation of the enterprise to pay its employees for their services already rendered
to the business.

5. SSS, PHILHEALTH, Withholding taxes Payable - these are obligations due to different agencies or
institutions of the government such as the Social Security System and Bureau of Internal Revenue.

6. Rent Payable - obligation of the enterprise as the lessee of the premises to pay the lessor, the owner
of the place being rented.

7. Other Payables - other obligations of the business that must be settled within one year.

NONCURRENT LIABILITIES – are liabilities which do not qualify as current ones, or those debts and
obligations that are due to be settled beyond one year and/or to be settled by payment of non-current
assets.

1. Long-term Notes Payable - notes payable that are due after one year.

2. Mortgage Payable - obligations which are secured by a mortgage of a real estate (land and/or
building).

OWNER'S EQUITY

1. Owner's Equity - is the account used to reflect the equity of the proprietor in the business. It refers
to the owner's investment in the enterprise.

2. Owner's Drawings - this account is used to refer to withdrawals by the proprietor of some earnings of
the business for personal use.

3. Income and Expense Summary - is a temporary account used to summarize the effects of
revenues/income and expenses to the equity accounts of the proprietor.

REVENUES

1. Service Income - refers to revenue account in a service-type business organization. It reflects the gross
earnings of the enterprise before all expenses of operations are deducted.

2. Other Income - other income earned by the business which is not directly related with its main
operations such as interest income, rental income, and commission income.

EXPENSES

The caption "Operating Expenses" is often used. The operating expenses for service-type business
operations include all costs of services that are used or consumed in the operations of the business.
1. Salaries Expense - refers to the cost of service rendered by the employees of the business. It may
include the cost of living allowances, 13th month pay, and other employee fringe benefits.

2. Rent Expense - refers to the cost of renting office space used by the business in its operations.

3. Supplies Expense - refers to the cost of office stationery, coupon bond, envelopes, ball pens and other
office supplies that are already used by the business.

4. Utilities Expense - refers to the cost of light and water and telephone services consumed in the
business operations.

5. Taxes and Licenses - refers to payments that are required by the Bureau of Internal Revenue and the
local Municipality or City where the business is located. Payments to different government
instrumentality as regards the proper registration of the business are also included in this account.

6. Transportation Expenses - refers to cost incurred by officers and employees for transportation in line
with the operations, e.g., meeting with the clients.

7. Representation and Entertainment - costs incurred in accommodating the customers or clients. Also
included are the costs when officers or employees represent the business in official transactions.

8. Depreciation Expense - refers to the portion of the cost of depreciable property that is charged
against current operations.

9. Doubtful Accounts Expense - refers to the amount of account receivables that is estimated to be
uncollectible and is charged against current year's operations.

10. Insurance Expense - refers to the premium chargeable to current year's operation on fire insurance
coverage, motor vehicles insurance coverage and other insurance plans.

11. SSS, PHILHEALTH, EC Expenses - refers to the contribution of the enterprise as the employer of the
employees in the Social Security System, PHILHEALTH and Employees Compensation.

12. Miscellaneous Expenses - refers to other costs in relation to the conduct of the business operations
that are normally incurred but each of the amounts is not significant enough to be given accounting
recognition individually. These amounts are grouped together and are called "miscellaneous expenses".
CLASSIFICATION OF ACCOUNTS

A. According to Financial Statement Presentation

1. REAL ACCOUNTS
(Balance Sheet accounts)

a. Assets
b. Liabilities
c. Capital

2. NOMINAL ACCOUNTS
(Income Statement accounts)

a. Revenues/income
b. Expenses

(Drawing account)
a. Owner's drawing

B. Whether Principal or Auxiliary

1. PRINCIPAL ACCOUNTS - accounts that can stand alone.

e.g., cash, accounts receivable, service income, sales

2. AUXILIARY ACCOUNTS - accounts that are aids or subsidiary to the main or principal accounts.

a. Adjunct account - added to the principal account.

Ex. Freight in

b. Contra account - deducted from the principal account.

Ex. Allowance for doubtful accounts, accumulated depreciation

C. Whether Permanent or Temporary

1. PERMANENT - accounts that are not closed at the end of the accounting period

2. TEMPORARY - accounts that are closed at the end of the accounting period.

SUMMARY OF THE RULES OF DEBIT AND CREDIT

A summary of the rules of debit and credit follows:

Rule 1: A debit entry increases an asset.

Rule 2: A credit entry decreases an asset.
Rule 3: A credit entry increases a liability.
Rule 4: A debit entry decreases a liability.
Rule 5: A credit entry increases owner's equity.
Rule 6: A debit entry decreases owner's equity.

The terms debit and credit are not synonymous with increase or decrease. They simply refer to the
position that the entries take in an account, which is either the left side or the right side.
BUSINESS PAPERS

The bases of recording transactions in books of accounts are documents called business papers. Some
common business papers are the official receipts, invoices, cash vouchers, checks, statements of
accounts, and promissory notes.

1.) OFFICIAL RECEIPTS - An official receipt is a document which gives evidence to a transaction involving
a receipt of cash. The document gives information on the amount of cash received, the person from
cash was received, the date of receipt and the reason for such receipt.

2.) INVOICE - An invoice is a document which gives evidence to a transaction involving the rendering of
sales or services giving information as to the name and address of the customer or client, the date the
sales or services were made, the terms of sales or service, the amount and other particulars about such
sales or services. An invoice is called a sales invoice from the point of view of the seller and a purchase
invoice from the point of view of the buyer.

3.) CASH VOUCHER - A cash voucher is a document which gives evidence to a transaction involving
payment of cash. This document gives information as to the name and address of the payee, the date of
payment, the amount paid, and an explanation for such payment.

4.) CHECK - A check is prepared whenever payment is to be made from cash in bank.

5.) STATEMENT OF ACCOUNT - A statement of account is a bill presented by a creditor requesting

payment for sales or services.

6.) PROMISSORY NOTE - A promissory note is a written promise made by a maker (debtor) promising to
pay the payee (creditor) a certain sum in money at a fixed or determinable future time.
ACCOUNTING CYCLE

The accounting cycle refers to a series of sequential steps or procedures performed to accomplish the
accounting process. It is referred to as a "cycle" because this is repeated each accounting period.

The accounting period may be any of the following:

1. Calendar-period - the accounting period starts on January 1 and ends December 31 of the same year.

2. Fiscal year - the accounting period starts at any date except the first calendar date and end one year
thereafter.

THE DIFFERENT STEPS IN THE ACCOUNTING CYCLE ARE:

1. IDENTIFICATION OF THE MEASURABLE ACCOUNTING EVENTS OR TRANSACTIONS. This is the first and
foremost step in the accounting cycle which consists the gathering of financial information through
business papers or documents and measuring the recordable amounts thereof.
2. JOURNALIZING. This is the process of recording transactions in a book of original entry called the
journal.

3. POSTING TO THE LEDGER. This is the process of transferring the accounts from the journal to a book
of final entry called the ledger.

4. PREPARING A TRIAL BALANCE. This is the process of taking account balances from the ledger and
preparing a list of the debit and credit balances of all accounts. The purpose of preparing a trial balance
is simply to check the arithmetic accuracy of the accounts in the ledger.

5. PREPARATION OF THE WORKSHEET AND ADJUSTMENTS. A worksheet is prepared in order to

facilitate the preparation of the financial statements, i.e., the Balance Sheet, Income Statement and
Statement of Changes in Capital and other Financial Report.

6. PREPARING THE FINANCIAL STATEMENTS. From the data recorded, classified, and summarized in the
above steps, the financial reports are prepared to include a balance sheet, an income statement, and a
statement of changes in financial position.

7. JOURNALIZATION AND POSTINGS OF ADJUSTING JOURNAL ENTRIES. This involves a review of all
ledger accounts and the recording of journal entries and postings of adjustments in order to bring all
accounts to correct balances.

8. CLOSING THE BOOKS. This the process of bringing all income and expense accounts to a zero balance
at the end of the year by transferring their balances to summary account called the income and expense
summary.

9. PREPARING A POST-CLOSING TRIAL BALANCE. This is a trial balance prepared after the income and
expense accounts have been closed. Therefore, the post- closing trial balance is a listing only of the
balances of assets, liabilities, and capital accounts.

10. REVERSING ENTRIES. This is the process of reversing certain adjusting entries made so that
accounting methods used in the previous years will be maintained in the next year. These reversing
entries are recorded at the beginning of the next accounting period and are optional.

IDENTIFYING TRANSACTIONS TO BE RECORDED

From the source documents identify the transactions that call for an accounting treated, that is, needed
to be recorded in the business books. Evaluate if the transaction affects the assets, liabilities, capital,
revenue or expenses accounts of the enterprise. Take note that we follow the double entry system of
accounting; hence at least two accounts are affected by each recordable transaction.

JOURNALIZING
 The first step in the bookkeeping process is journalization. Bookkeeping refers to the systematic
recording of transactions in the books of the enterprise.

JOURNALIZING is the process of recording transactions and events in a chronological order in the book
of original entry called the journal.

A general journal is a two-column journal with the following columnar headings: date, particular, F,
debit and credit. These columnar headings are used to provide the following information about the
transaction:

1. Date - This refers to the date when the transaction occurred.

2. Particulars - This refers to the names or titles of accounts where changes have been caused by the
transaction. A brief explanation of the event is also recorded.

3. P/R (Posting reference) or F - F which stands for 'folio' and is used as a reference guide to indicate the
ledger account to which an entry has been posted.

4. Debit - This is a money column used to record the debit amount of the entry.

5. Credit - This is also a money column used to record the credit amount of the entry.

GUIDELINES ON JOURNALIZING:

The following guidelines will be useful in recording transactions in a two-column general journal.

1. A complete journal entry includes the following data: the date, debit and credit accounts, debit and
credit amounts, and a brief explanation of the transaction. When an entry has two or more debits or
credits, the entry is a compound journal entry.

2. The date in a general journal includes the year, month, and day when the transaction occurred. These
complete data are recorded on the first entry of every journal page. Unless there is a new- year or
month on the journal page, it is sufficient to record only the day for subsequent entries.

3. The debit account is recorded at the extreme left of the particulars column. If there are two or more
debit accounts, these are all placed alongside the extreme left margin.

4. The credit account is recorded with a half-inch indention from the extreme left margin of the
particulars column to distinguish it from the debit account. All credit accounts are similarly placed. It is
important to note that all debit accounts are recorded before the credit accounts.

5. The explanation of the transaction must be brief and concise. This is also placed with an indention of
one inch from the extreme left margin of the particulars column.
6. Usually a line is left free between journal entries.

7. When recording the peso amounts in the money columns no commas or period need to be used. The
journal money columns are designed with specific boxes for each amount. To illustrate P 1,234,567.89
will be recorded in the money column as:

8. A peso sign may be placed before the first amount in a money column. No other peso sign in
necessary as all numbers in money columns are presumed to be in pesos.

9. When transactions do not include centavos, the centavo column may be left in blank. Dashes (-) or
ciphers (00) may also be used.

POSTING PROCEDURES

1. Based on the first debit entry in the journal, look for the account in the general ledger.

2. On the debit side date column, copy the date.

3. Copy the amount in the debit column.

4. Insert the journal page number in the folio column of the ledger.

5. Insert the ledger account number in the folio column of the journal.

6. Repeat steps 1 to 5 until all the accounts have been posted or transferred from the journal to the
ledger.
Steps number 4 and 5 is called cross reference. It facilitates the tracing of an entry to and from the
journal and ledger. Also, if the F columns are both filled up, it signifies that an entry has already been
posted. The folio column in the journal will be gradually filled up as the postings are made.
TRIAL BALANCE

At this point we should test the accuracy of our journalizing and posting process by preparing a trial
balance. A trial balance is a list of accounts with ledger balances. The following are the steps in
determining the balances of the ledgers:

1. Total the debit column and record it in small figures in pencil directly underneath the last debit
amount. This is called pencil footing. It is done in pencil and the figure is small to distinguish it from the
regular entry and to permit erasures if the figure is not correct.

2. Total the credit column and record it in small pencil figures directly under the last credit column
amount.
3. Extract the balance: if a debit balance, place it in the explanation column debit side in line with the
last debit posting in small pencil figure (see cash ledger); and if a credit balance, place it in the
explanation column credit side in line with the last credit posting.

4. You may not pencil foot if there is a single debit or credit amount only.

The trial balance gives the data needed in preparing the financial statements.

OBSERVE THE FOLLOWING RULES IN PREPARING THE TRIAL BALANCE:

1. Heading consists of three lines:

First line - Name of the business
Second line - Title of the report
Third line - Date

2. Account titles are arranged in the following order: Assets, Liabilities, Capital, Revenues and Expenses.

3. Only accounts with balances appear in the trial balance.

4. The peso sign is placed only in the first debit amount, first credit amount and on the totals.

5. The totals are ruled (one horizontal line drawn under the last amounts of the debit and credit
columns) and double ruled (two horizontal lines are drawn under the total figures).

6. If the total debits do not equal the total credits, then errors must have been committed. These should
be located before ruling and double ruling the totals. It is therefore advisable that the totals should be in
pencil figures first and if correct then write over in ink.
See to it that the debit totals is equal to the credit totals. If it is not so, then errors like transferring from
the journal to the ledger on the wrong side (cash debit was posted to the cash credit) or wrong amount
(cash debit 40,000 was posted to the debit of the cash ledger 400,000) or wrong footings or wrong
balances were copied in the trial balance.

ADJUSTING THE ACCOUNTS

Adjusting entries are made in order to reflect in the accounts the information on economic activities
that have occurred during the period covered but have not yet been recorded.

These entries are needed for proper measurement of revenues and expenses for the period and the
related assets and liability accounts.

PRINCIPLES SUPPORTING THE NEED FOR ADJUSTMENTS

The following are the accounting principles that form the bases for adjusting the accounts:
1.) GOING CONCERN - the entity is presumed to continue to exist unless evidence to the contrary is
shown. If management has significant concerns about the entity's ability to continue as a going concern,
the uncertainties must be disclosed.

2.) ACCRUAL BASIS OF ACCOUNTING - revenue is recognized when they are earned regardless of the
time when cash was received, and expenses are recognized when they are incurred regardless of the
time when cash was paid.

3.) REPORTING PERIOD - there is a presumption that financial statements will be prepared at least
annually.

4.) REVENUE RECOGNITION PRINCIPLE - revenues must be recognized when earned. Revenues are
earned in the accounting period when the services are rendered or goods sold are delivered.

5.) EXPENSE RECOGNITION PRINCIPLE - the principle governing the recording of expenses. All the
expenses incurred during the accounting period must be recorded.

6.) MATCHING PRINCIPLE - the expenses of the period must be associated directly or indirectly with the
revenue of the period.

ITEMS FOR ADJUSTMENTS

In a service-type business there are at most six items for adjustments. The number of adjusting entries
of course depends on the volume of transactions of a particular enterprise. These are the following: (1.)
Adjustment for Prepaid Expenses; (2) Adjustment for Accrued Income or Revenue; (3) Adjustment for
Accrued Expense; (4) Adjustment for Depreciation; (5) Adjustment for Bad Debts; (6) Adjustment for
Unearned Revenues/ Deferred Income.

THE WORKSHEET

Worksheet is a tool that facilitates the preparation of the financial statements. It is the device that
efficiently summarizes the data in the unadjusted trial balance and the adjustments to come up with the
financial statements on time.

STEPS IN PREPARING A WORKSHEET

1.) Write the Worksheet Heading: First line, the name of the enterprise; second line, "Worksheet", and
the third line, the period covered.

2.) Make the column headings: Account Title; first and second money columns, Unadjusted Trial
Balance; third and fourth money columns, Adjustments; fifth and sixth money columns, Adjusted Trial
Balance; seventh and eight money columns, Income Statement; and ninth and tenth money columns,
Balance Sheet. Each money column for each heading is identified as debit or credit.
3.) Enter the account balances in the unadjusted trial balance columns and total the amounts. Total
debits must equal total credits.

4.) Enter the adjusting entries in the adjustments columns and total the amounts. As each adjustment is
entered, a letter or a number is used to identify the debit entry and the corresponding credit entry.
Note that the adjustments are not journalized until after the worksheet is completed and the financial
statements are prepared.

5.) Compute each account's adjusted balance by combining the unadjusted trial balance and the
adjustment figures. Enter the adjusted amounts in the adjusted trial balance columns.
This procedure of combining horizontally, line by line, the amount of each account in the unadjusted
trial balance columns with the corresponding amount in the adjustments columns is called cross footing.

a.) ADD - when the unadjusted balance is the same as the adjustment (debit and debit, or credit and
credit).
b.) SUBTRACT - when the unadjusted balance is not the same as the adjustment (debit and credit, or
credit and debit)

6.) Extend the asset, liability and owner's equity amounts from the adjusted balance columns to the
balance sheet columns. Extend the revenue and expense amounts to the income statement columns.
Total the balance sheet and income statement columns.

7.) Note that the initial totals of the income statement and balance sheet columns are not equal. The
difference between the total credits and the total debits in the income statement is the net income or
net loss of the period.

a.) NET INCOME - total credits is greater than total debits. (Revenues > Expenses)

b.) NET LOSS - total debits is greater than total credits. (Revenues < Expenses)

Enter the net income in the DEBIT column of the income statement and compute the final column totals.
The income statement now has an equal total debits and credits.

Enter the net loss in the CREDIT column of the income statement and compute the final column totals.
The income statement now has an equal total debits and credits.

8.) Enter the net income in the credit column of the balance sheet and compute the final column totals.
The balance sheet must now have equal total debits and credits. If the result is net loss, enter the
amount of net loss in the debit column of the balance sheet and get the final column totals.

9.) Double rule the column totals.

PREPARING THE FINANCIAL STATEMENTS

 The financial statements of the enterprise can now be easily prepared. By looking at the Income
Statement column of the worksheet copy the balances of the revenues/income and expenses accounts.
In making the Balance Sheet, copy all the assets and liabilities, but before one can complete the Balance
Sheet it is necessary to prepare first the Capital Statement. The Capital Statement will show the changes
in the Owner's Equity section of the balance sheet.

ADJUSTING ENTRIES ARE JOURNALIZED AND POSTED

To meet the timeliness objective in financial statements preparation, it has been customary to the
accountants to prepare the financial statements immediately after completing the worksheet. The
adjustments which are directly entered in the worksheet are recorded in the general journal and posted
to the ledger only after the financial statements have been finalized.

CLOSING ENTRIES

Closing entries are done at the end of the accounting period in order to bring the temporary accounts
into zero balances. TEMPORARY accounts are the nominal accounts or the income statement accounts.
These are cleared of all outstanding balances in the general ledger so that at the start of the next
accounting period the revenue and expense accounts will be opened for recording of new transactions
covering the new accounting period.

Aside from income statement accounts other temporary accounts are: (1) owner's drawing account, (2)
Income and Expense Summary account.

Permanent accounts or the balance sheet accounts are not closed because their balances will be carried
over to the next accounting period.

PROCEDURES IN CLOSING THE BOOKS

1.) Refer to the worksheet and look at the Income Statement columns.

2.) All credit accounts must be debited and use "Income and Expense Summary" account as credit.

3.) All debit accounts must be credited and use "Income and Expense Summary" account as debit.

4.) All the income statement accounts are now closed. Get the balance of the "Income and Expense
Summary" account.

a.) DEBIT balance = Net Loss

b.) CREDIT balance = Net Income

5.) Close the "Income and Expense Summary" account to "Owner's, capital" account.
a.) Net Loss = Debit Owner's, capital

b.) Net Income = Credit Owner's, capital

6.) Close the "Owner's, drawing" account to "Owner's, capital" account. Credit owner's, drawing and
debit owner's, capital.

THE POST CLOSING TRIAL BALANCE

In order to prove the equality of debits and credits after recording and posting the adjustments and
closing entries, the post closing trial balance is prepared. This trial balance contains only balance sheet
accounts. The account balances in the Post Closing Trial Balance must be the same as in the Balance
Sheet.

The procedure in preparing Post Closing Trial Balance is to copy all accounts with balances from the
general ledger.

REVERSING ENTRIES

This is the last step in the accounting cycle. On the first day of the next accounting period, some
adjusting entries need to be reversed. This is called reversing entries simply because the debit entries
are credited while the credit entries are debited.

PURPOSES OF REVERSING ENTRIES

1.) So that the method used in recording for prepayments and deferrals will be consistently applied.

2.) For simplification of entries to be made in the succeeding accounting period, i.e., entry for payments.

REVERSIBLE ADJUSTING ENTRIES

1. Accrued Expense
2. Accrued Income
3. Prepaid Expenses under expense method
4. Unearned or Deferred Income under income method

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