LEARNING OUTCOMES

Learn the steps in the accounting cycle

Explain the purpose of adjusting entries.

Recording and posting of the adjusting entries

Preparation of Worksheet
The following steps are followed in the accounting cycle
1. Gather the documents
2. Journalization- is the process of recording the business transaction in the journal
3. Posting to the ledger is the process of transferring the information from the journal to the ledger
4. Preparing the trial balance is the process of taking the balances of open accounts from the ledger
5. Adjusting the books are entries prepared at the end of the accounting period and update the
records
6. Preparing the financial statements refers to the preparation of accounting report: Balance sheet
and Income statement
7. Closing the books refers to the preparation of closing entries at the end of the accounting
period to bring income and expense to zero balance
8. Preparing a post closing trial balance refers to the preparation of a trial balance after closing
the income and expense accounts. The post closing the trail balance shows only the asset,
liabilities, owner’s equity
9. Reversing entries are prepared at the beginning fo the next accounting period to reverse certain
adjustments that were made at the end of the accounting period.
 1. Understand the Business Documents or
Business Papers
➢ Business transactions are supported with documents.
➢ Source documents evidencing transactions of a business.
INVOICE- issued when service or merchandise is given to a customer or client.

The following should present

in invoices:
▪ Name of the company
▪ TIN
▪ Address
▪ Invoice Number

What
 Business Documents or Business Papers
➢ Business transactions are supported with documents.
➢ Source documents evidencing transactions of a business.
OFFICIAL RECEIPT- issued when cash is received by the entity

The following should present

in invoices:
▪ Name of the company
▪ TIN
▪ Address
▪ Invoice Number

What
 Business Documents or Business Papers
➢ Business transactions are supported with documents.
➢ Source documents evidencing transactions of a business.
Cash Voucher or Check voucher- is a document for paying cash or issuing checks. It
contains the name of the firm, address, telephone number. It signed by a preparer and
authorized officer. It must be signed by payee receiving the payment

What
 Business Documents or Business Papers
➢ Business transactions are supported with documents.
➢ Source documents evidencing transactions of a business.
Check- is a negotiable instrument used as a substitute for cash, the payment for which
is drawn against the entities or individual’s current account.

What
 Business Documents or Business Papers
➢ Business transactions are supported with documents.
➢ Source documents evidencing transactions of a business.
Promissory Note- is a written promise to pay a certain amount of money at a future
date.

What
 Business Documents or Business Papers
➢ Business transactions are supported with documents.
➢ Source documents evidencing transactions of a business.
Statement of Account- is a bill presented to a customer for service rendered or
merchandise given for which payment tis demandable.

What
2. Journalization
The Journal
• Called the book of original enty
• The debits and credit of each account are recorded chronologically by day.
• The process of recording in the book is called Journalizing

A journal entry contains the following actions:

1. Date
2. The account title and the amount debited
3. The account title and the amount credited
4. Explanation

Entries with one debit and credit is called simple journal entry
Entries with more than one debit or more than one credit is called
compound journal entry.
2. Journalization
The Rules on General Journal
1. Enter the column heading date, accounts, and explanation, F, Debit and credit
2. Enter on the date column the year and the month. The month is written only once
until you move to the next month. Enter the date in a smaller margin beside the
month.
3. Enter the debit account on the accounts and explanation column and the amount
on the date column.
4. Enter the credit account on the account and explanation column but indent it so as it
will not fall on the debit account margin. Enter the amount on the credit money
column.
5. Enter a brief explanation on the accounts and explanation column. Indent it further
so will not fall on the debit column and credit column.
Illustrative Problem:
Reyes organize the “ Reyes Repair Shop on Sep 2020. His transactions for the month of September are as follows:
July 1 A . Reyes invested P 50,000 in a repair business
Reyes Repair Shop Chart of Accounts
2 Paid taxes and licenses P 1,000 Account Title Account Number
4 Paid rent of P 1,000 Cash on hand 101
Accounts Receivable 102
8 Bought furniture on account, P 5,000
Furnitures and Fixtures 103
9 Bought a typewriter for cash P 2000
Office Equipment 104
12 Rendered service for cash P 5,000 Accounts Payable 201
13 Rendered services on account P8,000 Reyes Capital 301

15 Paid salaries P 2,000 Reyes Drawing 302

Service Income 401
20 The owner withdrew cash of P 2,000
Taxes and Licenses 501
22 A Reyes made an additional investment of P 5,000 Rent Expense 502
24 Partial collection of account of July 13 Salaries Expense 503

29 Paid account of July 8

31 Paid salaries July 16~31, P 2000

Journal entries
Date Explanations F Debit Credit
2020
September 1 Cash on hand 50,000
Reyes Capital 50,000
To record investment

2 Taxes and licenses 1,000

Cash on hand 1,000
Payment of taxes and licenses

4 Rent expense 1,000

Cash on hand 1,000
Payment of rent

8 Furniture and fixtures 5,000

Accounts Payable 5,000
Purchase of furniture's
Journal entries
Date Explanations F Debit Credit
2020
September 9 Office Equipment 2,000
Cash on hand 2,000
Purchase of typewriter in cash

12 Cash on hand 5,000

Service Income 5,000
Service income rendered for cash

13 Accounts Receivable 3,000

Service income 3,000
Service rendered on account

15 Salaries Expense 2,000

Cash on hand 2,000
Payment of salaries
Journal entries
Date Explanations F Debit Credit
2020
September 20 Reyes Drawing 2,000
Cash on hand 2,000
Withdrawal of cash

22 Cash on hand 5,000

Investment 5,000
Additional investment

24 Cash on hand 8,000

Accounts Receivable 8,000
Partial collection of account

29 Accounts Payable 5000

Cash on hand 5,000
Payment of July account
Journal entries
Date Explanations F Debit Credit
2020
September 31 Salaries Expense 2,000
Cash on hand 2,000
Payment of salaries
3. Posting to Ledger
The General Ledger
• show in one page all the changes ( increases or decrease) that took place
for a particular account.
• called the book of final entry because the entries are finally summarize in
the book. A group of accounts.
Two Kinds of Ledger
• General Ledger- is a group of controlling accounts. An accounts is a
record of asset, liabilities, and owner’s equity
• Subsidiary Ledger- showing the details of the general ledger accounts. We
keep accounts called Account Receivable Subsidiary Ledgers and creditor
accounts called Accounts Payable Subsidiary Ledger.
3. Posting to Ledger
The General Ledger
• show in one page all the changes ( increases or decrease) that took place
for a particular account.
• called the book of final entry because the entries are finally summarize in
the book. A group of accounts.
Two Kinds of Ledger
• General Ledger- is a group of controlling accounts. An accounts is a
record of asset, liabilities, and owner’s equity
• Subsidiary Ledger- showing the details of the general ledger accounts. We
keep accounts called Account Receivable Subsidiary Ledgers and creditor
accounts called Accounts Payable Subsidiary Ledger.
3. Posting to Ledger
Example of General Ledger
Cash on Hand
Date Item F Debit Date Item F Credit
July 1 J-1 50,000 July 2 J-1 1,000
12 J-1 5,000 4 J-1 1,000
22 J-1 5,000 9 J-1 2,000
24 J-1 3,000 15 J-1 2,000
20 J-1 2,000
29 J-1 5,000
31 J-1 2,000

Referring to the Journal transactions on slide 14-17

3. Posting to Ledger
Example of General Ledger
Cash on Hand
Date Explanations Reference Debit Credit Balance

Referring to the Journal transactions on slide 14-17

2020 Debit Credit
Sep 1 Investment by Reyes J1 50,000 50,000
2 Payment taxes J1 1,000 49,000
4 Payment of rent J1 1,000 48,000
9 Purchase of typewriter J1 2,000 46,000
12 Collection from customer J1 5,000 51,000

15 Payment of salaries J1 2,000 49,000

20 Personal drawing J1 2,000 47,000
22 Additional investment J1 5,000 52,000
24 Collection of account receivable J2 3,000 55,000
29 Payment on account J2 5,000 50,000
31 Payment of salaries J2 2,000 48,000
3. Posting to Ledger
Example of subsidiary Ledger
3. Prepare Trial balance
The trial balance shows the balance of account brought about by the business transactions.
Rules in preparing the trial balance
1. Heading consist of three lines: Name of the business, Title of the report, and Date
2. Account titles are arranged in the following order; Asset, Liabilities, Capital, Revenues, and Expenses
3. Note that even the accounts payable, although it is zero, still appears in the trial balance.
4. The peso sign is place only on the first debit account, first credit account, and the totals
5. The totals are rulled ( two horizontal lines under the last amount of the debit and credit columns. And doubled rule (
two horizontal) lines are drawn under the total figures.
6. If the total debit does not tally with the total credit, then errors must have been committed which be located before
ruling and double ruling the totals.
3. Prepare Trial balance
4. Prepare adjusting entries
The Need for Adjustment
Adjusting entries are journal entries usually prepared at the end of accounting period to update the records in order
to present fairly accurate financial reports.
Accounting period- is any period in the life of the business where financial reports prepared.

Accounts that usually adjusted at the end of the accounting period

✓ Accrued income- income already earned but uncollected
✓ Accrued Expense- expenses already used up but unpaid
✓ Prepaid Expense- advance payment for and expense
✓ Deferred Revenue- advance collection for income
✓ Bad debts- accounts of customers that cannot be collected anymore or are doubtful of collection
✓ Depreciation- decrease in utility value of acquired assets subject to wear and tera , obsolesce or inadequacy
4. Prepare adjusting entries
Accrued Income and Accrued Expense
Illustration: Healthway Clinic signed a contract of rent on January 1 for a store space owned by Madrigal Realty.
The contract required a regular rental payment of P20,000. December rent has not been paid. Accounting period
ends December 31
Date Explanations F Debit Credit
2018
December 31 Rent Expense 20,000
Rent payable 20,000
To adjust for rental fee due to Healthway Clinic

Viewpoint of Madrigal Realty:

Date Explanations F Debit Credit
2018
December 31 Rent Receivable 20,000
Rent Income 20,000
To adjust for the December rent due from
Healthway
4. Prepare adjusting entries
Accrued Income and Accrued Expense
Illustration: Healthway Clinic issued a 45 day , 18% note on December 1 for P 100,000 cash loan received from RP
Finance.
Calculation: 100,000x 0.18x30/360= P 1500
Date Explanations F Debit Credit
2018
December 31 Interest expense 1,500
Interest Payable 1,500
To accrue interest for 30 days to RP Finance

Viewpoint of RP Finance
Date Explanations F Debit Credit
2018
December 31 Interest Receivable 1,500
Interest Income 1,500
To accrue interest for 30 days due from
Healthway Clinic
4. Prepare adjusting entries
Prepaid Expense

Two Methods:
1. Asset Method- the advance payment is initially debited as an asset “ Prepaid expense” since the expense is not yet
incurred or used up.
2. Expense Method- advance payment is initially debited as Expense even if it not used up. If at the end of the
accounting period there is an unused or unexpired portion, and adjustment is made to record the asset.
4. Prepare adjusting entries
Prepaid Expense under Asset Method
Illustration: Mario Drugstore issued a check for P 9,000 on Nov 1 representing six months advance rental for a
store space owned by Madrigal Realty.

Date Explanations F Debit Credit

2018
Nov 3 Prepaid Rent 9,000
Cash in bank 9,000
To record payment for six months

At the end of the year:

Date Explanations F Debit Credit
2018
December 31 Rent expense 3,000
Prepaid rent 3,000
To adjust two months rent
4. Prepare adjusting entries
Unearned Income Under the liability

Two Methods:
1. Liability Method- a liability account “Unearned Income “ is credited upon receipt of cash since the company is
liable to provide service
2. Income Method- an income statement account “ Service Income” is credited upon receipt of cash representing
income even if it still to be earned. If at the end of the year, service has been provide, adjust to record the liability
for the unearned portion by decreasing the income initially recorded.
4. Prepare adjusting entries
Unearned Income
Illustration: Mario Drugstore issued a check for P 9,000 on Nov 1 representing six months advance rental for a
store space owned by Madrigal Realty.
Madrigal Realty initially records a liability for the advance collection
Date Explanations F Debit Credit
2018
Nov 3 Cash on hand 9,000
Unearned Rent Income 9,000
To record payment for six months

At the end of the year:

Date Explanations F Debit Credit
2018
December 31 Unearned Rent Income 3,000
Rent Income 3,000
To adjust two months rent
4. Prepare adjusting entries
Bad debts

Two Methods:
1. Direct Write off Method- recognizes bad debts expense only when it is certain that the company will not be able to
collect the account anymore
2. Allowance Method- follows the matching principle which recognizes bad debts or doubtful accounts at the time
service is rendered. Estimation is based on the company’s past experience.
4. Prepare adjusting entries
Bad debts
Illustration: The accountant at the end of the year , based on past experiences estimated that 5% of its
outstanding accounts receivable will be doubtful of collection
Total Receivable end of the year: P 30,000
At the end of the year:
Date Explanations F Debit Credit
2018
December 31 Doubtful Account Expense 1,500
Allowance for Doubtful Accounts 1,500
To setup allowance

The allowance for doubtful account is a contra asset account which is deducted from the principal account, account
receivable. The difference is called Net realizable value.
Net Realizable value: P 30,000-P 1,500= P 28,500.00
4. Prepare adjusting entries
Depreciation
Utility value- represents the ability of the asset to yield service.
Obsolete- when it is replaced by a new model or invention
Inadequate- when it fails to cope up with demands for a higher volume or quantity.

Three factors to be considered in determining depreciation:

1. The cost of the asset
2. Scrap value or disposal value
3. Useful life – represents the productive life of the asset which maybe expressed in number of years.

Common formula used to calculate the depreciation expense

Entry:
Depreciation Expense ( debit)
Cost- Scrap Value
Accumulated Depreciation ( credit)
Useful life stated in No. of Years
Worksheet
is an analysis paper bridging the trial balance to the financial elements.
It contains the year end data like adjusting entries thus facilitating the preparation of financial reports

Heading contains the name of the business, name of the report and the date covered

Column Heading for a 10 column worksheet

First 2 money columns- Trial Balance, debit , and credit
Next 2 money columns- Adjustments, debit, and credit
Next 2 money columns- Adjusted trial balance, debit and credit
Next 2 money columns- Income statement , debit, and credit
Last 2 money columns, Balance sheet , debit and credit
Worksheet
STEPS in preparing the worksheet

1. Copy the trial balance as is in the worksheet under the heading “ Trial balance” check again the totals and double rule
2. Prepare the adjusting entries using the adjustments data in the problem. Be sure to number the entries for cross
referencing. Total columns and double rule
3. Extend the amount to the adjusted trial balance. Accounts in the trial balance without the adjustment will be extended as
they are. If an account has adjustment, take note that:
A. Debit ( trial balance column ) and debit ( adjustment column ), add the two in the adjusted trial balance debit side
B. Credit( trial balance column) and credit ( adjustment column) add the two in the credit side of the adjusted trial
balance.
C. Debit ( Trial balance) and credit ( adjustment column) , subtract and place the balance to the column of greater
value
D. Total the columns and double rule . Be sure they are equal.
4. At this point, disregard the trail balance and the adjustment columns. Concentrate only on the Adjusted trial balance.
Extend all assets, liabilities, drawing, and capital accounts to the Balance sheet and the income and expense accounts to
the income statement.
5. Take note that the Income statement and the Balance sheet columns will not be equal because the result of the operation
will appear either as income or lsss. The income /loss will be the balancing figure in the Balance sheet.
Worksheet