*LECTURE *

DAY 1: ADJUSTING ENTRIES & CHART OF ACCOUNTS (PERIODIC &

PERPETUAL)
DEFERRALS AND ACCRUALS

Accountants use adjusting entries to apply accrual accounting to transactions that cover more than one
accounting period. There are two types of adjustments made at the end of the accounting period – deferrals and
accruals.

Each adjusting entry affects a balance sheet account (an asset or a liability account) and an income statement
account (income or expense account).

Deferral is the postponement of the recognition of “an expense already paid but not yet incurred,” or “revenue
already collected but not yet earned”. This adjustment deals with an amount already recorded in a balance sheet
account; the entry, in effect, decreases the balance sheet account and increases an income statement account.

Deferrals would be needed in two cases:

1. Allocating assets to expense to reflect expenses incurred during the accounting period (e.g. prepaid insurance,
supplies and depreciation).
2. Allocating revenues received in advance to revenue to reflect revenues earned during the accounting period
(e.g. subscription).

Prepaid Rent
On May 1, a company paid P8,000 for two months’ rent in advance. By May 31, one-half of the asset had
expired.

Rent Expense P4,000 P4,000 is computed by P8,000 x 1/2

Prepaid Rent P4,000

Prepaid Insurance
A company has acquired a one-year comprehensive insurance coverage on the service vehicle and paid P14,400
premiums. At the end of the month, the part of the insurance had already expired.

Insurance Expense P1,200 P1,200 is computed by P14,400 x 1/12

Prepaid Insurance P1,200

Supplies
On May 8, a company purchased supplies, P18,000. At the end of the month, the inventory count showed that
supplies costing P15,000 are still on hand.

Supplies Expense P3,000 P3,000 is computed by P18,000 – P15,000

Supplies P3,000

Depreciation
1. Asset cost is the amount an entity paid to acquire the depreciable asset.
2. Estimated salvage value is the amount that the asset can probably be sold for at the end of its estimated
useful life.
3. Estimated useful life is the estimated number of periods that an entity can make use of the asset. Useful life is
an estimate, not an exact measurement.
Straight-line Method
Formula: Depreciation = (Asset cost – Estimated Salvage Value) / Estimated Useful Life

Suppose that a company bought a Service Vehicle for P420,000 with an estimated salvage value of P84,000 that
will last for seven years. The depreciation for the month is:

Depreciation Expense P4,000

Accumulated Depreciation – Service Vehicle P4,000

Unearned Revenue (a liability)

On May 15, a company received P10,000 as an advance payment. At the end of the month, P4,000 was already
rendered.

Unearned Revenue P4,000

Revenue P4,000

Accrual is the recognition of “an expense already incurred but unpaid”, or “revenue earned but uncollected”.
This adjustment deals with an amount unrecorded in any account; the entry, in effect, increases both a balance
sheet and an income statement account.

Accruals would be required in two cases:

1. Accruing expenses to reflect expenses incurred during the accounting period that are unpaid and unrecorded.
2. Accruing revenues to reflect revenues earned during the accounting period that are uncollected and
unrecorded.

Accrued Salaries
Payroll for the five-day workweek, to be paid on Friday, is P140,000. The last day of the period is a
Wednesday.

Salaries Expense P84,000 P84,000 is computed by P140,000 x 3/5

Salaries Payable P84,000

Accrued Interest
At the end of December, a company has an accrued expense from a borrowed P100,000-one-year note with 7%
annual interest on October.

Interest Expense P1,167 P1,167 is computed by P100,000 x 7% x 2/12

Interest Payable P1,167

Accrued Revenue
Services totaling P7,800 had been performed but not yet billed or recorded.

Accounts Receivable P7,800

Service Revenue P7,800

Example Problem:
Prepare the adjusting entry for HUGOT COMPANY under each of the following for the year ending Dec. 31,
2012.
a. Paid P24,000 for a 1-year fire insurance policy to commence on Sept. 1. The amount of premium was debited
to Prepaid Insurance.
b. Accrued interest on notes payable amounted to P15,000.
c. Paid P160,000 cash to purchase a delivery van (surplus) on Jan. 1. The van was expected to have a 3-year life
and a P10,000 salvage value. Depreciation is computed on a straight-line basis.
d. Received an P18,000 cash advance for a contract to provide services in the future. The contract required a 1-
year commitment, starting April 1.
e. Purchased P6,400 of supplies on account. At year’s end, P750 of supplies remained on hand.
f. Invested P90,000 cash in a certificate of deposit that paid 4% annual interest. The certificate was acquired on
May 1 and carried a 1-year term to maturity.
g. Paid P78,000 cash in advance on Sept. 1 for a 1-year lease on office space.

Test Problem:
The HIRAP COMPANY presented the following information pertaining to accounts that will need adjustments
for its Nov. 30, 2012 year-end financial statements:
a. On Oct. 1, 2012, HIRAP COMPANY paid P10,800 for 6-months’ insurance premiums.
b. The balance in the ledger account Office Supplies amounted to P32,000. A count of the office supplies on
Nov. 30, 2012 totaled P12,800.
c. HIRAP COMPANY received P22,800 on Nov. 1, 2012 from a customer for services to be rendered during
the months of November, December, January, and February.
d. HIRAP COMPANY acquired Office Equipment costing P352,800 on Apr. 1, 2012. The equipment is
expected to last 5 years after which it will be worthless.
e. Assume that Nov. 30, 2012 is a Friday and that HIRAP COMPANY pays its employees a total of P87,500 on
Saturday.

CHART OF ACCOUNTS

PERIODIC SYSTEM PERPETUAL SYSTEM

110 Cash 110 Cash
120 Accounts Receivable 120 Accounts Receivable
130 Merchandise Inventory 130 Merchandise Inventory
140 Supplies 140 Supplies
150 Equipment 150 Equipment
210 Accounts Payable 210 Accounts Payable
220 Notes Payable 220 Notes Payable
310 Pabebe, Capital 310 Pabebe, Capital
320 Pabebe, Withdrawals 320 Pabebe, Withdrawals
330 Income Summary 330 Income Summary
410 Sales 410 Sales
420 Sales Returns and Allowances 420 Sales Returns and Allowances
430 Sales Discounts 430 Sales Discounts
510 Purchases 510 Cost of Sales
520 Purchases Returns and Allowances 520 Salaries Expense
530 Purchase Discounts 530 Transportation Out
540 Transportation In 540 Utilities Expense
610 Salaries Expense 550 Miscellaneous Expense
620 Transportation Out
630 Utilities Expense
640 Miscellaneous Expense
DAY 2: JOURNAL ENTRIES, POSTING AND TRIAL BALANCE
CASH DISCOUNTS

Cash discounts are called purchase discounts from the buyer’s viewpoint and sales discount from the seller’s
point of view. Cash discount is designated by such notation as “2/10” which means the buyer may avail of a two
percent discount if the invoice is paid within ten days from the invoice date.

TRANSPORTATION EXPENSE

Treatment of the Transportation Costs

Freight Terms Who shoulders the Costs? Who pays the Shipper?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller

Transportation Out is both in a periodic and a perpetual inventory system.

Transportation In is only in the perpetual inventory system.

JOURNALIZING TRANSACTIONS (PERIODIC & PERPETUAL)

Example Problem:
Pabebe established the MALAYA COMPANY on September 1, 2017. The following transactions occurred
during the month:
Sept. 1 Pabebe invested P450,000 cash to establish the business.
2 Acquired equipment for cash, P150,000.
3 Acquired supplies for cash, P10,300.
4 Purchased merchandise from SUKONA COMPANY, P210,500. Terms: 3/10, n/30.
6 Sold merchandise costing P131,500 for cash, P175,000.
7 Purchased merchandise from LABAN COMPANY, P125,000.
9 Sold merchandise costing P71,250 to SAKIT COMPANY on account, P95,000. Terms: 2/10,
n/30.
11 Received returns from SAKIT COMPANY for defective merchandise, P12,000.
12 Paid amount due from SUKONA COMPANY less discounts.
12 Received payment from SAKIT COMPANY less returns and discounts.
13 Purchased P170,000 merchandise from AYOKONA COMPANY. Terms: 3/10, n/30.
15 Acquired supplies worth P25,200 on account.
15 Paid salaries, P10,000.
16 Paid P4,000 freight to PAASA EXPRESS for delivering merchandise last Sept. 13.
17 Sold merchandise costing P189,000 to SAKITPUSO COMPANY on account, P252,000. Terms:
2/10, n/30.
18 Purchased P195,000 merchandise from PUSONGWASAK COMPANY.
19 Paid P2,000 to PAASA EXPRESS for freight charges on merchandise sold.
21 Returned merchandise purchased from AYOKONA COMPANY, P20,000.
22 Sold merchandise costing P165,000 for cash, P220,000.
23 Paid the amount due from AYOKONA COMPANY less returns and discounts.
24 Sold merchandise costing P60,000 on account to UMASA COMPANY P80,000. Terms: 2/10,
n/30.
25 Paid P500 freight charges on merchandise sold.
 26 Borrowed from a bank P500,000 evidence by a 10% 2-year interest bearing note.
27 Received payment from SAKITPUSO COMPANY less discounts.
28 Received returns from UMASA COMPANY for defective merchandise, P20,000.
29 Pabebe withdraw P100,000 from the business.
30 Paid the following expenses:
Salaries P10,000
Utilities P15,000
Miscellaneous P12,000

Note for Periodic System: A count of the merchandise inventory on September 30 amounted to P205,500.

General Journal

DATE ACCOUNT TITLES AND EXPLANATION P.R DEBIT CREDIT

.
2017
Sep 1 Cash 110 P450,000
t
Pabebe, Capital 310 P450,000
Initial Investment

POSTING TRANSACTIONS (PERIODIC & PERPETUAL)

General Ledger

Account: CASH Account No: 110

Date Item J.R. Balance
Debit Credit Debit Credit
Sept 1 Investment GJ-1 P450,000 P450,000

Account: PABEBE, CAPITAL Account No: 310

Date Item J.R. Balance
Debit Credit Debit Credit
Sept 1 Investment GJ-1 P450,000 P450,000

MAKING A TRIAL BALANCE (PERIODIC & PERPETUAL)

MALAYA COMPANY
TRIAL BALANCE
SEPTEMBER 30, 2017

Account Titles Debit Credit

CASH P450,000
PABEBE, CAPITAL P450,000
TOTAL P450,000 P450,000
DAY 3: FINANCIAL STATEMENTS

INCOME STATEMENT

Periodic
MALAYA CAPITAL
INCOME STATEMENT
FOR THE MONTH ENDED SEPTEMBER 30, 2017

SALES P822,000
LESS: SALES RETURN AND ALLOWANCES P32,000
SALES DISCOUNTS P6,700 P38,700
NET SALES P783,300
BEGINNING INVENTORY 0
ADD: PURCHASES P700,500
TRANSPORTATION IN P4,000
LESS: PURCHASES RETURNS AND ALLOWANCES P20,000
PURCHASES DISCOUNTS P10,815
ENDING INVENTORY P205,500
COST OF SALES P468,185
GROSS PROFIT P315,115
SALARIES EXPENSE P20,000
TRANSPORTATION OUT P2,500
UTILITIES EXPENSE P15,000
MISCELLANEOUS EXPENSE P12,000
TOTAL EXPENSES P49,500
NET INCOME P265,615

Perpetual
MALAYA CAPITAL
INCOME STATEMENT
FOR THE MONTH ENDED SEPTEMBER 30, 2017

SALES P822,000
LESS: SALES RETURN AND ALLOWANCES P32,000
SALES DISCOUNTS P6,700 P38,700
NET SALES P783,300
COST OF SALES P616,500
GROSS PROFIT P166,800
SALARIES EXPENSE P20,000
TRANSPORTATION OUT P2,500
UTILITIES EXPENSE P15,000
MISCELLANEOUS EXPENSE P12,000
TOTAL EXPENSES P49,500
NET INCOME P117,300
CHANGES IN EQUITY

Periodic
MALAYA CAPITAL
STATEMENT OF CHANGES IN EQUITY
FOR THE MONTH ENDED SEPTEMBER 30, 2017

Pabebe, Capital Beginning 0

Add: Investment P450,000
Profit P265,615
Total P715,615
Less: Pabebe, Withdrawals P100,000
Pabebe, Capital Ending P615,615

Perpetual
MALAYA CAPITAL
STATEMENT OF CHANGES IN EQUITY
FOR THE MONTH ENDED SEPTEMBER 30, 2017

Pabebe, Capital Beginning 0

Add: Investment P450,000
Profit P117,300
Total P567,300
Less: Pabebe, Withdrawals P100,000
Pabebe, Capital Ending P467,300