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Unit II - THE ACCOUNTING PROCESS
(SERVICE AND TRADING)
Topics: (21 hours)
- Business transactions and source documents
- The accounting equation/ Typical account titles used
- The accounting cycle/Rules of debit and credit and their applications
- Journalizing
- Posting
- Preparation of Trial Balance
- Journalizing and posting adjusting entries
- Journalizing and posting closing entries
- Preparing post-closing trial balance
- Work Sheet Preparation
- Financial statements preparation
- Journalizing and posting reversing entries Lesson 1 - Business transactions and Accounting Equation Business Transaction An accountable event or economic event which has an effect on assets liabilities and equity of the business entity. An event which involves an exchange of values between two parties, value received and value parted with. Business transactions may be:
- Internal - only the business is involved in the business transaction. Parties involved Example of Business transactions The business only The building was destroyed by fire - loss is recognized The business only Provision for depreciation for depreciable assets
- External - the parties involved are the business and a third party. Third Party involved Example of Business transactions Another business entity The business purchased office supplies from ABC Supplies Company for P 1,500 cash. The owner The owner, Mr. Reyes invested additional cash of P 15,000 to the business The creditor The business purchased goods from FTG Trading Company, P 10,000 on account. The government The business paid business permits and licenses, P 2,000. The employees The business paid salaries of the employees for the month, P 15,000.
Source Documents Each transaction must be supported by a document. The document must be properly compiled and controlled for easy reference. Where good system of record keeping exists, financial information becomes more reliable for it can easily be traced back to the source documents. Original documents are considered better source documents than duplicated or copies. Examples of Source Documents
- Official receipts (OR) this supports cash payments if the OR is issued by other entities or it supports cash receipts if OR is issued by the business.
- Sales Invoice supports sales if issued by the seller and supports purchases if received by the purchaser or buyer.
- Statement of Account supports liability to a creditor for purchases of goods or services on account or services received from a s,ervice provider like, VIWAD, FICELCO, PLDT.
- Payroll sheet supports payment of salaries of employees.
- IOUs supports advances made by employees.
- Promissory note supports receivable from customers, if issued by customer and if issued by the business, supports liability or payable to creditor.
- Bank Statements, Bank Passbook, validated deposits and withdrawal slips supports information about cash in bank. Basic Accounting Equation ASSETS = LIABILITIES + EQUITY Note: (Equity or Capital for Sole Proprietorship is Owners’ Equity, Partners’ Equity for Partnership, Shareholder’s Equity for Corporation) Accounting equation states that assets must always equal to liabilities (creditors’ equities) and owner’s equities. It shows that business entity’s assets come from 2 sources or equities – borrowings from lenders or creditors (liabilities), and contributions or investment by the owners ( capital). Elements of Financial Statements The elements of financial statements defined in the March 2018 Conceptual Framework for Financial Reporting are: assets, liabilities and equity – relate to reporting entity’s financial position; and income and expenses – relate to reporting entity’s financial performance.
- Equipment – consists of various assets a. Machineries and other factory equipment b. Store Furniture and Fixtures (shelves to display goods for sale, etc.) c. Office Equipment – ( tables, chairs, cabinets, etc. used in the office), d. Computer Equipment ( server, laptops, etc.) e. Transportation Equipment ( delivery trucks, vehicle, etc.)
Accumulated Depreciation – equipment - the total amount of depreciation expenses
recognized since the equipment was acquired and made available for use. Note : Accumulated Depreciation is a valuation account which represents the decrease in value of a fixed asset due to continued use, wear & tear, passage of time, and obsolescence. It is a contra-asset account and is presented as a deduction to the related fixed asset. C. Intangibles – long-term assets with no physical substance, such as goodwill, patent, copyright, trademark, etc. LIAIBILITIES A present obligation of the entity to transfer an economic resource as a result of past events. It represent claims by other parties aside from the owners against the assets of a company. Per revised PAS 1, an entity shall classify liability as current when: a. it expects to settle the liability in its normal operating cycle; b. it holds the liability primarily for the purpose of trading; c. the liability is due to be settled within 12 months after the reporting period; or d. the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. All other liabilities should be classified as non-current liabilities. Classifications of liabilities are: Current Liabilities – Examples are: Accounts Payable - obligations supported by an oral or informal promise to pay by the debtor. Notes Payable - obligations supported by a written promise to pay by the debtor in the form of a promissory note. Bank Payable or Loan Payable – obligations or debts owed to bank(s) or financing institutions for money borrowed and for use in business operations. Interest Payable – interest incurred but not yet paid. Interest payable arises from interest bearing liabilities, e.g. bank loan. Utilities Payable – obligations or debts owed to utility companies for the use electricity, water, internet and telephone facilities. Unearned income – income already received or collected in advance but not yet earned or goods or services are not yet provided.
Current portion of long-term debt – portions of long term debt, such as mortgage payable, bonds payable, etc, , which are to be paid within one year from the balance sheet or statement of financial position date. Non-current Liabilities (Long Term Liabilities) Liabilities are not currently payable. They are not due within the next 12 months after the end of the accounting period or the company's normal operating cycle, whichever is shorter. In other words, non-current liabilities are those that do not meet the criteria to be considered current. Examples: Mortgage payables – obligations and debts owed to financial institutions for which the business entity pledged as security certain asset, such as land and buildings. Bonds Payable – business entity obtains fund for acquisition of equipment and other assets by issuing bonds. These are debts due to bond holders. EQUITY ( Capital, Net Assets) Residual amount after deducting liabilities from assets Owner’s Capital - used to record original and additional investment, withdrawals, profits earned or losses incurred by the business Owner’s Capital Increased by Decreased by Investments by the owner Permanent withdrawal by the owner Profit earned by the business Losses incurred by the business Owner’s Drawing – used to record temporary withdrawals of the owner during the period. At the end of the period, any balance of this account is closed to Owner’s capital account. Income Statement Accounts Income Service Income - revenues earned from rendering services to clients (examples: beauty salon, massage parlor, repair shop, etc. ). Professional Fees – income earned from the practice of profession for professional services rendered,( doctors, lawyers, etc.) Rent Income – income earned by lessor engage in renting apartments, condominiums, machineries and equipment, etc.) Sales – revenues derived from sale of goods or merchandise. Interest income – revenues earned by lending institutions for lending or granting loans to others.
Business transaction is an event which involves an exchange of values between two parties, value received and value parted with. The following effects are classified as valued received: The following effects are classified as value parted with
Increase in Assets Decrease in Assets
Decrease in Liabilities Increase in Liabilities
Decrease in Capital/Equity Increase in Capital/Equity
Due to: increase in withdrawal Due to: investments
Increase in expenses (incurred) Increase in income (earned)
Illustrative Problem 1 : Problem 1: Selected business transactions of the SPEEDY REPAIR SHOP for the month of June 2021: June 2021 1 - Mr. Mac Cascas started a shoe repair business by investing P 50,000 cash, Furniture and Fixtures, P 5,000 and repair supplies, P 3,000.. 3 - Paid the rent of the shoe repair business for one month, P 1,200. 5 - Purchased a shoe repair equipment from Capitol Shoe Supply, P 15,000. Terms: 90 days. 8 - Paid to Capitol Shoe Supply P 5,000 cash to apply on account. 10 - Purchased various chairs and tables for shop use from Reliable Home Furnishing, P 1,800. Terms. Cash. 12 - Cash received for services rendered P 13,500. 15 - Paid the required mayor’s permit and licenses to operate business, P1,500. 18 - Purchased additional repair supplies for shop use for cash P 2,200. 20 - Received a bill from Islander for advertisement that appeared in the newspaper, P 310. 22 - Issued a 120-day note to Capital Shoe Supply for the balance of the account with them. 25 - Sent a bill to Zenith Footwear for various repair services rendered P 16,500. 26 - Received a check from Zenith Footwear, P 5,000 to apply on account. 30 - Paid the salary of shop employees, P 4,200. 30 - Mr. Cascas, the owner, withdrew cash for personal use P 3,000. REQUIRED: Analyze the above transactions by giving the: a) Value received and value parted with - state the appropriate account title to be used b) Accounting elements affected and the effect on the elements affected
Solution: TRANSACTION ANALYSIS Effect on Transaction Account Title Amount A L OE June, 2021 1- Mr. Mac Cascas started a shoe repair VR - Cash 50,000 + business by investing P 50,000 cash, Furniture and Fixtures 5,000 + Furniture and Fixtures, P 5,000 and Repair Supplies 3,000 + repair supplies, P 3,000. VPw/ - Mr. Mac Cascas, Capital 58,000 + 3 - Paid the rent of the shoe repair VR - Rent Expense 1,200 - business for one month, P 1,200 VPw/ - Cash 1,200 - 5 - Purchased a shoe repair equipment VR – Repair Equipment 15,000 + from Capitol Shoe Supply, P 15,000. Vpw/- Accounts Payable 15,000 + Terms: 90 days 8 - Paid to Capitol Shoe Supply P 5,000 VR- Accounts Payable 5,000 - cash to apply on account. VPw/ - Cash 5,000 - 10 - Purchased various chairs and tables VR- Funiture and Fixtures 1,800 + for shop use from Reliable Home VPw/- Cash 1,800 - Furnishing, P 1,800. Terms. Cash. 12 - Cash received for services rendered VR - Cash 13,500 + P 13,500. VPw/- Service Income 13,500 + 15 - Paid the required mayor’s permit & VR- Taxes and Licenses 1,500 - licenses to operate business, P 500. VPw/- Cash 1,500 - 18- Purchased additional repair supplies VR- Repair supplies 2,200 - For shop use for cash P 2,200.. VPw/- Cash 2,200 - 20 - Received a bill from Islander for VR- Advertising Expense 310 - advertisement that appeared in the VPw/- Accounts Payable 310 + newspaper,P 310. 22 - Issued a 120-day note to Capital VR - Accounts Payable 10,000 - Shoe Supply for the balance of the VPw/- Notes Payable 10,000 + account with them. 25 - Sent a bill to Zenith Footwear for VR- Accounts Receivable 16,500 + repair services rendered P 16,500. VPw/- Service Income 16,500 + 26 - Received a check from Zenith VR- Cash 5,000 + Footwear, P 5,000 to apply on account VPw/- Accounts Receivable 5,000 - 30 Paid the salary of shop employees, VR - Salary expense 4,200 - P 4,200 VPw/- Cash 4,200 - 30 - Mr. Cascas, the owner, withdrew VR – Mr. Mac Cascas, Drawing 3,000 - cash for personal use P 3,000. VPw/- Cash 3,000 -
15,000 = 15, (5,000) (5,000) 43,800 5,000 3,000 15,000 = 10,000 56, 66,800 = 66, 10 - Purchased various chairs and tables for shop use from Reliable Home Furnishing, P 1,800. Terms. Cash. Analysis: Increase in Asset : Furniture and Fixtures (chairs & tables) , P 1, Decrease in Asset (payment) : Cash, P 1, Note: Accounting elements affected – Assets only: Increase in one form of asset and Decrease in another form of asset. Accounting Equation: Assets = Liabilities Owner’s Equity Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital 50,000 5,000 3,000 = 58, ( 1,200) ( 1,200) – Expense 15,000 = 15, (5,000) (5,000) (1,800) 1, 42,000 6,800 3,000 15,000 = 10,000 56, 66,800 = 66, 12 - Cash received for services rendered P 13,500. Analysis: Increase in Asset : Cash , P 13, Increase in Equity : increase in income, P 13, Accounting Equation: Assets = Liabilities Owner’s Equity Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital 50,000 5,000 3,000 = 58, ( 1,200) ( 1,200) – Expense 15,000 = 15, (5,000) (5,000) (1,800) 1, 13,500 13,500 (Income) 55,500 6,800 3,000 15,000 = 10,000 70, 80,300 = 80, 15 - Paid the required mayor’s permit and licenses to operate business, P1, 500. Analysis: Decrease in Asset : Cash (payment) , P 1, Decrease in Equity : increase in Expense, P 1, Accounting Equation: Assets = Liabilities Owner’s Equity Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital 50,000 5,000 3,000 = 58, ( 1,200) ( 1,200) – Expense
15,000 = 15, (5,000) (5,000) (1,800) 1, 13,500 13,500 - Income (1,500) (1,500) expense 54,000 6,800 3,000 15,000 = 10,000 68, 78,800 = 78. 18 - Purchased additional repair supplies for shop use for cash P 2,200. Analysis: Increase in Asset : Repair Supplies , P 2, Decrease in Asset : Cash (payment) , P 2, Accounting Equation: Assets = Liabilities Owner’s Equity Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital 50,000 5,000 3,000 = 0 58, ( 1,200) ( 1,200) – Expense 15,000 = 15, (5,000) (5,000) (1,800) 1, 13,500 13,500 - Income (1,500) (1,500) expense (2,200) 2, 51,800 6,800 5,200 15,000 = 10,000 68, 78,800 = 78. 20 - Received a bill from Islander for advertisement that appeared in the newspaper, P 310. Analysis: Increase in Liability : Accounts Payable, P 310 Decrease in Equity : increase in expense (advertising incurred), P 310 Accounting Equation: Assets = Liabilities Owner’s Equity Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital 50,000 5,000 3,000 = 58, ( 1,200) ( 1,200) – Expense 15,000 = 15, (5,000) (5,000) (1,800) 1, 13,500 13,500 - Income (1,500) (1,500) expense (2,200) 2, 310 (310) -expense 51,800 6,800 5,200 15,000 = 10,310 68, 78,800 = 78. 22 - Issued a 120-day note to Capital Shoe Supply for the balance of the account with them. Analysis: Increase in Liability : Notes Payable, P 10, Decrease in Liability : Accounts Payable P 10,
Accounting Equation: Assets = Liabilities Owner’s Equity Cash Accounts Receivable Furn & Fix Repair Supplies Repair Equipt. Accounts Payable Note Payable (^) M. Cascas, Capital 50,000 5,000 3,000 = 58, ( 1,200) ( 1,200) – Expense 15,000 = 15, (5,000) (5,000) (1,800) 1, 13,500 13,500 - Income (1,500) (1,500) expense (2,200) 2, 310 (310) -expense (10,000) 10, 16,500 16,500 - income 5,000 (5,000) 56,800 11,500 6,800 5,200 15,000 = 310 10,000 84, 95,300 = 95, 30 - Paid the salary of shop employees, P 4,200. Analysis: Decrease in Assets : Cash (payment) , P 4, Decrease in Equity : increase in expense, P 4, Accounting Equation: Assets = Liabilities Owner’s Equity Cash Accounts Receivable Furn & Fix Repair Supplies Repair Equipt. Accounts Payable Note Payable (^) M. Cascas, Capital 50,000 5,000 3,000 = 58, ( 1,200) ( 1,200) – Expense 15,000 = 15, (5,000) (5,000) (1,800) 1, 13,500 13,500 - Income (1,500) (1,500) expense (2,200) 2, 310 (310) -expense (10,000) 10, 16,500 16,500 - income 5,000 (5,000) (4,200) (4,200) expense 52,600 11,500 6,800 5,200 15,000 = 310 10,000 80, 91,100 = 91,
30 - Mr. Cascas, the owner, withdrew cash for personal use P 3,000. Analysis: Decrease in Assets : Cash (payment) , P 3, Decrease in Equity : withdrawal by owner, P 3, Accounting Equation: Assets = Liabilities Owner’s Equity Cash Accounts Receivable Furn & Fix Repair Supplies Repair Equipt. Accounts Payable Note Payable (^) M. Cascas, Capital 50,000 5,000 3,000 = 58, ( 1,200) ( 1,200) – Expense 15,000 = 15, (5,000) (5,000) (1,800) 1, 13,500 13,500 - Income (1,500) (1,500) expense (2,200) 2, 310 (310) -expense (10,000) 10, 16,500 16,500 - income 5,000 (5,000) (4,200) (4,200) expense (3,000) (3,000) - Drawing 49,600 11,500 6,800 5,200 15,000 = 310 10,000 77, 88,100 = 88, Lesson 1 Activity 1: Name: _________________________________ I - Account Classification Instructions: On the space provided after each of the items below, write the letter(s) corresponding to: 1 - the account classification: CA - Current Assets OE – Owner’s Equity NCA - Non-Current Assets I - Income CL - Current Liabilities E - Expenses NCL - Non-Current Liabilities 2 - the Statement where the account should be presented. IS – Income Statement SFP – Statement of Financial Position Account 1 - Classification 2 - Statement
- Accounts Payable
- At the beginning of the year, the assets of Silver Services were P 360,000 and its owner’s equity was P 200,000. During the year, assets increased by P 120,000 and liabilities increased by P 20,000. What was the owner’s equity at the end of the year? ___________________
- At the beginning of the year, Peña Calling Station had liabilities of P100,000 and owner’s equity of P96,000. If assets increased by P 40,000 and liabilities decreased by P 30,000, what was the owner’s equity at the end of the year? ______________________
- The liabilities of Ragal Company equal one-third of the total assets and the owner’s equity is P240,000. What is the amount of the liabilities? ___________________
- A company has assets of P 600,000 and owner’s equity of P450,000. What is the amount of liabilities? _________________________
- ARD company has liabilities of P147,000 and owner’s equity of P 236,500. What is the amount of assets? __________________________ IV. Supply the missing element of performance: Income Expense Profit (Loss)
- P 840,000? P 360,
- 2,400,000? 540,
- 1,300,000 P 860,000?
- 2,000,000 720,
- 1,800,000 (400,000)
Lesson 1 Activity 2 - Transaction Analysis The following transactions were taken from the books of TRJ Services for the month of July 2021: July 2021 1 - TR Tan invested cash, P 30,000, office furniture and equipment P 10,000, and office supplies P 5, 2 - Paid rent for the month, P 3, 5 - Bought additional office supplies from Berzo Tdg. P 3,000 cash. 8 - Receipts for the week for services rendered amounted to , P 16, 10 - Bought a typewriter from VERA Marketing, for P 20,000. Terms: 50% down, balance on account. 15 - Paid taxes and licenses, P 2,500. 18 - Paid in full the account with VERA. 20 - Billed CRT Corp. for services rendered, P 10,000. 21 - Cash receipts for services rendered, P 14,500. 23 – Received 30 day promissory note for P 15,000 from RND Company for services rendered. 25 - Received P 6,000 cash from CRT Corp. to apply on account 28 - Paid salary of employees, P 6,000.
29 - Paid light and water bills, P 1,200. 31 - TR Tan withdrew P 4,000 cash for personal use. 31 – Collected in full the account of CRT Corp. REQUIRED. Analyze the above transactions by giving the: a) Value received and value parted with and state the appropriate account title to be used b) Accounting elements affected and the effect on the elements affected ASSETS LIABILITIES OWNER’S EQUITY Cash Accounts Payable TR Tan, Capital Accounts Receivable TR Tan, Personal Office Supplies Service Income Office furniture and equipment Salaries and Wages Taxes and Licenses Utilities expense Rent Expense
Note: Answer sheet is given below. May be handwritten but use the same format.
Lesson 1 Activity 2 - Transaction Analysis
Name: _______________________
Answer sheet: Effect on Transaction Account Title Amount A L OE July 1 VR - VPw/ - 2 VR - VPw/ -
- VR – Vpw/-
- (10,000) 10,000 additional invest P 105,000 5,000 8,000 70,000 18,500 169,
Lesson 2 – Books of Accounts, Double-entry System and The accounting cycle
Books of Accounts Two books of accounts maintained by business entity
- Book of original entry - Journal
- Book of Final Entry - Ledger Journal (Books of original entry) Book or accounting record where business transactions are recorded for the first time through journal entries. This recording phase is called journalizing. Types of journals:
- General Journal - a 2 column journal where: a. all business transactions are recorded if a business entity does not utilize special journals, b. all transactions that cannot be recorded in the special journals are recorded if a business entity uses special journals.
- Special journals – is used to record similar transactions. a. Sales journal – used to record sales on account b. Purchase journal – used to record purchases of goods or merchandise on account. c. Cash receipts journal – used to record all transactions involving cash receipts d. Cash disbursements journal – used to record all transactions involving cash payments. (Note) : For Service Business – General Journal will be used to record business transactions For Merchandising Concern – Special Journals and General Journal will be used to record business transactions. Ledger (Book of final entries) A systematic compilation of group of accounts used to classify the effects of business transactions by transferring the entries from the journal (book original entry) to the ledger (book of final entries. This process is called posting. Types of ledgers a. General ledger – contains all the accounts (controlling accounts) appearing in the trial balance b. Subsidiary ledger – shows the breakdown of the balances of the controlling account, (e.g. Accounts receivable, accounts payable, etc.). DOUBLE ENTRY BOOKKEEPING Double entry bookkeeping system is based on the fundamental accounting assumption that all business transactions have two-fold effects – that for every value received , there is a corresponding equal value given up. Value received is always debited while value parted with is always credited. RULES OF DEBIT AND CREDIT Debit Credit
- Increase in Asset 1. Decrease in Asset
- Decrease in Liability 2. Increase in Liability
- Decrease in Owner’s Equity 3. Increase in Owners Equity due to: due to: a) withdrawal a) investment b) expenses incurred b) income earned
