FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A.

Gano,CPA,MBA,MAEd

“Accounting could be most boring subject in the world, and quite possibly also the most confusing. But if you
want to be rich, long term, it could be the most important subject.”

ACCOUNTING
 The art of recording, classifying and summarizing in a significant manner and in terms of money,
transactions and events which are in part at least of a financial character, and interpreting the
results thereof.
 It is the process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of information.

BOOKKEEPING
 Primarily concerned with the mechanical and the routine functions of accounting involving recording
and preparation of financial statements.
 Accounting is broader than bookkeeping as it includes not only the preparation of financial
statements but also the analysis and interpretation of the generated accounting information.

AUDITING
 The examination of the financial statements to determine whether they conform to established
standards (GAAP: Generally Accepted Accounting Principles). Now called Philippine Standards of
Accounting (PSA) & Philippine Financial Reporting Standards (PFRS).
Kinds of audit:
i. External or Independent Audit
ii. Internal Audit

Luca Pacioli - father of Modern Accounting

 Published the book “Summer de Arithmetica, Geometrica, Proportionali et Proportionalita.
 First introduced the double entry bookkeeping system

FIELDS OF ACCOUNTING
A. Functional Accounting
1. Financial Accounting
2. Management Accounting
3. Auditing
4. Tax Accounting
5. Cost Accounting
6. Accounting Systems Installation

B. OCCUPATIONAL ACCOUNTING
1. Public Practice – Independent auditor/s
2. Private Practice (Commerce and Industry)
3. Government Accounting
4. Research and Education

KINDS OF BUSINESS
A. As to Operation or Source of Income
1. Service business
e.g. Law, Accounting firms, hospitals and apartments.
2. Merchandising or Trading Business
e.g. book, department, sari-sari stores, hardware
3. Manufacturing Business
e.g. food, car, machinery, paper factory, etc.

B. As to Organization
1. Sole or Single Proprietorship
 one owner/proprietor
2. Partnership
 2 or more partners/owners
i. General Partnership
ii. Limited Partnership
3. Corporation
 5-15 original/initial owners
i. Stock Corporation
i. Close Corporation
ii. Public Corporation
ii. Non-stock Corporation
4. Cooperative
 Special type of Corporation; many; consumers

GAAP (Generally Accepted Accounting Principles)

FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

 These are fundamental principles being followed in preparing financial statements adopted by a
group of practitioners. Now called Philippine Standards of Accounting (PSA) & Philippine Financial
Reporting Standards (PFRS).
.
USERS OF ACCOUNTING INFORMATION

1. The owners; management

 Need information for them to improve the business
2. Investors (present and potential)
 Need information for them to determine if they should buy, hold or sell their investments in the
business/enterprise.
3. Employees
 Need information for them to determine the profitability and ability of the business to provide
remuneration, benefits and employment.
4. Lenders
 Need information for them to determine whether they should grant loans or if their loans, including
interest (of the business) will be paid on due.
5. Suppliers and other trade creditors
 Need information for them to determine whether they should deliver goods or if the amounts owing to
them will be paid when due.
6. Customers
 Need information about the continuance of the enterprise especially when they are dependent from it.
7. Government and other Agencies
 Need information about the activities of the enterprise and also for them to regulate the activities of the
enterprise, determine taxation policies and as a basis for national income.
8. Public
 Information helps public by informing them about recent trends and developments as well as
employment opportunities. Also, the contribution of the business to the economy.

BASIC UNDERLYING ACCOUNTING ASSUMPTIONS

i. Accounting Entity Assumption

 Accounting records must focus on a particular unit of accountability or entity, separate from the
records of the owners, managers, employees and others who constitute the business enterprise.

ii. Going Concern Assumption

 Assumes that businesses are established with the intention that the business will survive and
continue indefinitely.

iii. Monetary Unit Assumption

i. Quantifiability – The elements of accounting should be stated in a uniform unit of measure or
currency.
ii. Stability of Peso – It assumes that the purchasing power of peso is stable and constant and its
instability is insignificant and therefore can be ignored.

- We use the historical cost as a basis for recording transactions and we don’t restate them later due to
inflation or changes in the purchasing power of peso.

iv. Periodicity Assumption/Time period Assumption

 The economic activities of an entity are divided into various artificial uniform time periods for
financial reporting purposes. This time period is usually one year or the accounting cycle
whichever is longer.
i. Calendar Year – Jan. 1 to Dec. 31
ii. Fiscal Year – Starts any time of the year and ends 12 months after

v. Accrual (related to MATCHING PRINCIPLE)

 The effects of transactions and events are recorded when they occur (not when cash is received or
disbursed) and recorded in the accounting records and reported in the financial statements of the
time period to which they relate.
 Revenues are recorded when they are earned not when they are received/collected.
 Expenses are recorded when they are incurred not when they are paid/disbursed.
ACCOUNTING CONSTRAINTS

i. Timeliness
 Accounting information must be made available when needed and communicated early enough
before a decision is to be made. (Again, because it will help make better decisions.)

ii. Cost-Benefit
 The benefit derived from obtaining information should exceed the cost incurred in obtaining the
information.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

iii. Materiality
 A particular rule in accounting which states that strict adherence with GAAP is not required when
the items are not significant enough to affect the valuation, decision and fairness of the Financial
Information.

PHASES OF ACCOUNTING
i. Recording
 The translation of financial events and transactions into written accounting data.
 journalizing
2. Classifying
 Similar and interrelated transactions are grouped together in their respective classes (accounts).
 posting to the ledger
3. Summarizing
 At the end of an accounting period, data regarding the business are grouped and summarized
through the preparation of financial statements.
 Preparing Financial Statements from the ledger or trial balance
4. Interpreting
 This is the analysis phase where in the financial statements are utilized by various users specially
the management in decision making, planning and determining the status of the business.

TRANSACTION - is an accomplished event or condition, the recognition of which results in a change in the
accounting elements.

Characteristics:
1. It must be for a sum certain in money
2. It must be supported by a genuine source document
3. It must have two parts:
a. Value received (Debit)
b. Value parted with (Credit)
4. It must have a two-fold effect on the elements of accounting:
a. Assets- economic resources of an enterprise.
b. Liabilities- economic obligations of an enterprise.
c. Capital- ownership interest in an enterprise.

ELEMENTS OF ACCOUNTING

i. Assets
 These are resources controlled by the enterprise as a result of past transactions and events and
from which future economic benefits are expected to flow into the enterprise.
ii. Liabilities
 These are present obligations of the entity arising from past transactions and events, the settlement
of which is expected to result in an outflow from the entity of resources embodying economic
benefits.
iii. Capital/Equity
 This is the residual interest in the assets of the entity after deducting all its liabilities. That portion or
amount of assets financed by the owner/s of the firm.
iv. Revenues/Income
 Inflow of future economic benefits that increases equity other than contributions or investments from
owners.
 It is the income generated from sale of goods or services, or any other use of capital or assets,
associated with the main operations of an organization before any costs or expenses are deducted
(http://www.businessdictionary.com/definition/revenue.html).
v. Expenses
 Consumptions or outflow of future economic benefits that decreases equity other than distributions
or dividends paid to owners.
 Money spent or cost incurred in an organization's efforts to generate revenue, representing the cost
of doing business. (http://www.businessdictionary.com/definition/expense.html)

BASIC ACCOUNTING FORMULA:

ASSETS = LIABILITIES + CAPITAL

THE ACCOUNT
 An accounting device used to record increases and decreases in the different elements of
accounting (assets, liabilities, capital, revenues and expenses) caused by the business transactions
that have transpired.
 The T-Account is the simplest form of account and is illustrated below:

Account Title
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

DEBIT CREDIT
- Always the left side - Always the right side
VALUE RECEIVED = = VALUE PARTED WITH

Rules of Debit and Credit

 A transaction always affects 2 sides of an account (either increase or decrease). This is known as
the Double entry bookkeeping system.

ASSETS LIABILITIES + CAPITAL

Assets Liabilities Withdrawals Capital

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
To Inc. To Dec. To Dec. To Inc. To. Inc. To Dec. To Dec. To Inc.

Expenses Revenues
DEBIT CREDIT DEBIT CREDIT
To. Inc. To Dec. To. Dec. To Inc.

Summary:
DEBIT CREDIT
1. To increase an ASSET - To decrease an ASSET
2. To decrease a LIABILITY - To increase a LIABILITY
3. To decrease CAPITAL - To increase CAPITAL
4. To increase DRAWINGS/WITHDRAWALS - To decrease DRAWINGS/WITHDRAWALS
5. To decrease REVENUE - To increase REVENUE
6. To increase EXPENSE - To decrease EXPENSE

 The normal balance/side of an account is the side where you record the INCREASE.

Another way of illustrating the accounts which will highlight their normal balances/sides is shown below:

Accounts with Debit as their normal balance Accounts with Credit as their normal balance
- All increases are recorded on the DEBIT side and - All increases are recorded on the CREDIT side and
all decreases are recorded on the CREDIT side all decreases are recorded on the DEBIT side
except for Expenses except for Revenues

Assets Withdrawals Liabilities Capital

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
To Inc. To Dec. To Inc. To Dec. To. Dec. To Inc. To Dec. To Inc.

Expenses Revenues
DEBIT CREDIT
To. Inc. To Inc.

 Addition by position – done by placing the amount on its normal balance.

 Subtraction by position – done by placing the amount on its abnormal balance.

Effects of Transaction on the Elements of Accounting

i. Increase in Asset (↑) = (↑) Increase in Liabilities

ii. Increase in Asset (↑) = (↑) in Capital
iii. Increase in Asset (↑) = (↓) in other forms of Assets
iv. Decrease in Asset (↓) = (↓) in Liabilities
v. Decrease in Asset (↓) = (↓) in Capital
vi. Decrease in Liabilities (↓) = (↑) in Capital
vii. Decrease in Liabilities (↓) = (↑) in other liabilities
viii. Decrease in Capital (↓) = (↑) in liabilities
ix. Decrease in Capital (↓) = (↑) in other forms of Capital
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

 Note that Transactions affecting Expenses and Revenues, as well as Owner’s Drawing are
captured in the Capital (Owner’s Equity) account as at the end of the accounting cycle, they will
all be closed to the capital account.

Illustration:

Mr. Boy Bakal opened his new business on March 1 of the current year and named it “Man of Steel Auto
Repair Shop.” Below are some selected transactions of the business for the month with its corresponding
journal entries.

i. On March 1, Mr. Boy Bakal invested ₱ 250,000 cash in the business as its initial capital.

JOURNAL ENTRY: CASH 250,000

BAKAL, CAPITAL 250,000

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Cash (Asset Account) is debited since the business has received the amount from the owner
increasing the value of its assets. Bakal, Capital (Capital Account) is credited since the amount is
transferred from the owner to the new business as initial capital investment increasing the owner’s
equity.

ii. On March 2, the company purchased repair equipment worth ₱ 85,000 from Matsuko Inc. on account
payable after 30 days.

JOURNAL ENTRY: FIXED ASSETS 85,000

ACCOUNTS PAYABLE 85,000

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Fixed Asset (Asset Account) is debited since the business has received the repair equipment
increasing the value of its assets. Accounts Payable (Liability Account) is credited since the term of
payment is charge or on account, meaning to be paid in the future, thereby increasing the
company’s liability.

iii. On the same date (March 2), the company purchased various repair supplies worth ₱ 12,000 from
Carcarag Auto supply bought for cash.

JOURNAL ENTRY: PREPAID REPAIR SUPPLIES 12,000

CASH 12,000

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Prepaid Repair Supplies (Asset Account) is debited since the company has received supplies
increasing assets yet to be used/consumed. Cash (Another Asset Account) is credited since the
company paid cash in acquiring the supplies thereby reducing the company cash.

iv. On March 3, the company finished the repair for the car of Mr. Crocodile and billed him for ₱ 5,000. He
will pay after 30 days.

JOURNAL ENTRY: ACCOUNTS RECEIVABLE 5,000

SERVICE REVENUE 5,000

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Accounts receivable (Asset Account) is debited since there is an increase in the amount to be
collected/received by the company from the customer in the future and Service Revenue (Revenue
Account – Capital/Owner’s Equity) is credited since there is an increase in the Income of the
business resulting from the rendering of repair services.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

v. On March 10, the owner, Mr. Bakal, withdrew ₱ 8,000 from the business to be used for an emergency.

JOURNAL ENTRY: BAKAL, WITHDRAWAL 8,000

CASH 8,000

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Bakal, Withdrawal (Capital/Owner’s Equity Account) is debited since the capital investment of the
owner has decreased and cash (Asset Account) is credited since the 8,000 cash of the company
was given back to the owner.

vi. On March 12, the company received ₱ 32,000 from various customers for repair services rendered to
them.

JOURNAL ENTRY: CASH 32,000

SERVICE REVENUE 32,000

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Cash (Asset Account) is debited since cash is received as payment thereby increasing assets.
Service Revenue (Revenue Account – Capital/Owner’s Equity) is credited since there is an increase
in the revenue of the business resulting from the rendering of repair services.

vii. On March 20, the company paid the electric bill received for the month amounting to ₱ 3,500.

JOURNAL ENTRY: UTILITIES EXPENSE 3,500

CASH 3,500

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Utilities expense (Expense Account - Capital/Owner’s Equity Account) is debited since there is an
increase in expense or decrease in owner’s equity due to consumption/usage of electricity. Cash
(Asset Account) is credited as cash was used to pay the bill resulting in the decrease of cash.

viii. On March 25, Mr. Crocodile settled his account in relation to the transaction last March 3.

JOURNAL ENTRY: CASH 5,000

ACCOUNTS RECEIVABLE 5,000

ASSETS = = LIABILITIES + + OWNER’S EQUITY

EFFECT:

 Cash (Asset Account) is debited as cash is received from the customer as payment for his
obligation. Accounts Receivable (Another Asset Account) is credited since the amount receivable or
collectible from the customer is now settled/paid.

ix. On March 30, the company paid ₱ 20,000 as partial payment to the repair equipment acquired last
March 2.

JOURNAL ENTRY: ACCOUNTS PAYABLE 20,000

CASH 20,000
ASSETS LIABILITIES OWNER’S EQUITY
= +

EFFECT:

 Accounts Payable (Liability Account) is debited since the company’s liability to the supplier has
decreased by ₱ 20,000. Cash (Asset Account) is credited as cash was used to pay the obligation
resulting in the decrease of cash.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

x. On the same date, the company issues a promissory note payable after 2 months for the balance of the
amount owed last March 2 for the repair equipment acquired worth ₱ 85,000. The balance is ₱ 65,000
since a partial payment was made on March 30 amounting to ₱ 20,000.

JOURNAL ENTRY: ACCOUNTS PAYABLE 65,000

NOTES PAYABLE 65,000

ASSETS = LIABILITIES + OWNER’S EQUITY

EFFECT:

 Accounts Payable (Liability Account) is debited since the company’s liability to the supplier has
decreased by ₱ 65,000. Notes Payable (Another Liability Account) is credited since another form of
liability is created or increased in place of the accounts payable.

BASIC FINANCIAL STATEMENTS

i. BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

 A formal statement showing the financial position of an entity as of a particular date.
 It is called a balance sheet simply because assets are balanced with equity.
Contains the following:
i. Assets
ii. Liabilities
iii. Capital/Equity

Financial Position components:

i. Liquidity – Capacity to pay short-term obligations/liabilities.
ii. Solvency - Capacity to pay long-term obligations/liabilities.
iii. Capacity for adaptation – Capability of the enterprise to generate cash for unexpected
requirements/ emergencies and investment opportunities.

ii. INCOME STATEMENT (STATEMENT OF COMREHENSIVE INCOME)

 A formal statement showing the performance of the entity for a certain period.
 A formal report that shows the result of operations/profitability of a firm for a specific period of time.
Contains the following:
i. Revenues
ii. Expenses

FORMS:
i. Natural Presentation- nature of Expense Method. Applicable to a service business.
ii. Functional Presentation- Function of Expense Method or Sales Method.
Performance is synonymous with Results of operations (The difference between total revenues and total
expenses is net income/net loss or profit/loss for the period)

Profitability – Capacity of the firm to generate income from its operations.

iii. CASH FLOW STATEMENT

 A formal statement showing the receipts and disbursements of cash of the entity for a certain
period.

Components:
i. Operating Activities:
 Receipts and disbursements of cash related to payments of liabilities (accounts payable), collection
of receivables (accounts receivable), cash receipts from customers for sale of goods and services
and cash payments for various expenses.

ii. Investing Activities:

 Receipts and disbursements of cash arising from purchases of assets other than inventories or
other assets intended for sale as well as sale of assets other than inventories or other assets
intended for sale.

iii. Financing Activities

 Receipts of cash arising from borrowings (loans) and investments from owners. Cash outflows for
subsequent payments of loans and returns on investment (interest for loans and dividends for
owners/stockholders).

iv. STATEMENT OF CHANGES IN OWNER’S EQUITY

FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

 Bridge between the balance sheet and income statement that shows the changes in the capital
account due to contributions, withdrawals, and net income or net loss for a period. It contains the
following:
i. Beginning Capital
ii. Net Income/Loss
iii. Additional Investments
iv. Withdrawals
v. Ending Capital

COMPONENTS OF THE BASIC FINANCIAL STATEMENTS

BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

i. ASSETS

i. Current Assets – Assets readily convertible to cash or consumable within one year from the
Balance Sheet date or the normal operating cycle whichever is longer.

a. Cash – Coins and currencies as well as bank current, savings and time deposits.

b. Receivables – short-term collectibles from suppliers, employees, officers and other parties
(Opposite of Payables)
a. Accounts Receivable – represents amounts owed by customers/clients arising
from sale of goods or conduct of service without any formal written promise to
pay.
b. Notes Receivable – represents amounts collectible from customers/clients arising
from sale of goods or conduct of service services with a formal written promise to
pay.
c.Other Receivables – Advances to officers and employees or Due from officers and
employees; dividends receivable, etc.

 A formal written promise to pay may take the form of a promissory note or a contract.

 Allowance for doubtful accounts/Allowance for bad debts

 A Contra Asset Account used to record estimates of possible uncollectible accounts receivable.
(defaulted accounts).
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

c. Inventories – Assets held in the ordinary course of business which is primarily held for sale
or as raw material components or work-in-process goods for production of other products.

d. Prepaid Expenses – Expenses paid in advance but not yet used up or consumed. (Advance
payment of an expense). E.g. prepaid rent, prepaid supplies, prepaid advertising, etc. –
Opposite of Accrued expenses

e. Other Current Assets. E.g. Short-term investments, security deposit, etc.

ii. Non-current Assets – Assets which are long term in nature

a. Fixed assets/Property plant and equipment (PPE) – Are tangible assets held by the
business for use and expected to be used for more than 1 year. E.g. Building, Land,
Machineries, Equipment, Furniture and Fixtures.)

 Accumulated Depreciation
 A contra asset account representing the usage of the PPE or expired cost of the asset up to the
present.

b. Intangible assets – Are long lived assets without physical substance and whose value lies in
rights, privileges and competitive advantages that they give the owner.

TYPES:
a. Intangible Assets with indefinite life (e.g. Goodwill)
b. Intangible Assets with finite life – subject to amortization over estimated/expected
useful life. (e.g. Patent, copyright, trademark, franchise, etc.)

1. Accumulated Amortization
 A contra asset account representing the usage of a finite lived Intangible Asset or expired cost of
the asset up to the present.

c. Long Term Investments – Are assets held by the enterprise for accretion of wealth through
the receipt of interest, royalties, dividends as well as capital appreciation.
a. Investment in stocks (of other companies)
b. Investment in bonds
c.Other investments. E.g. investment in real estate and other long-term investments

d. Other non-current assets – e.g. cash in closed banks, non productive property (abandoned
property no longer in use, and other long term receivables.

1. Accumulated Impairment loss

 A contra asset account representing the partial decline in value of an asset due to various reasons
such as obsolescence, damage, market value decline, negative effects of technology, market,
economy or laws, etc.

 In case of a total decline in value for instance due to destruction, the asset affected should be re-
recognized or removed from the books and recorded as an immediate expense (e.g. loss).

ii. LIABILITIES

i. Current Liabilities – Obligations of the company which are expected to be settled within one year from
the balance sheet date.

a. Payables – short-term obligations to suppliers, employees, officers and other parties (Opposite
of Receivables).
a. Accounts Payable – represent amounts owed to suppliers for various purchases
without written promise
b. Notes Payable (short term) – represent amounts owed to suppliers for various
purchases with written promise, payable within 1 year or less.
c.Other Payables – Advances to officers and employees (Vales), dividends payable,
Withholding tax payable, mandatory contributions payable (for SSS, Phil-Health, PAG-
IBIG contributions), etc.

b. Unearned/Deferred Revenue – Obligations for goods and services that a company must provide
or deliver in the future in return for advance payment from customers (e.g. Unearned service
revenue, unearned interest revenue, unearned rent income).

c. Accrued expenses/Accrued liabilities – Expenses incurred but not yet paid (e.g. accrued
salaries payable, accrued interest payable. – Opposite of Prepaid expenses.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

d. Other current liabilities – e.g. Current portion of a long term debt (loans of bonds payable), etc.

ii. Non-current Liabilities – All those not classified as current liabilities shall fall as non-current liabilities.

a. Long-term notes payable - with written promise, payable after one year or the non-current
portion of a long-term debt.

b. Loans payable – These are long-term obligations for loans acquired by the company

c. Bonds payable – These are long-term obligations as a result of issuing bonds (certificates of
indebtedness)

d. Other Non-current liabilities. E.g. fidelity bond payable, retirement benefits payable, etc.

iii. CAPITAL

 called Owner’s Equity for a sole proprietorship

 called Partners’ Equity for a partnership
 called Stockholder’s/Shareholder’s Equity for a corporation

i. (Name of the Owner), Capital – The total initial and additional contribution/investments made by the
owner, which is further increased by profits and decreased by losses and owner’s withdrawals.

ii. (Name of the Owner), Drawing/Withdrawal – Represent assets (cash or property) taken by the
owner for personal use (in effect, this means taking back the fruits of investment or return on
investment)

INCOME STATEMENT (STATEMENT OF COMPREHENSIVE INCOME)

i. REVENUE

i. Service Revenue/Professional Fees – Revenue earned from providing services. Appropriate

accounts may be used depending on the industry where the business belongs for instance:
i. Tuition fees for rendering of educational services as in the case of schools and universities;
ii. Medical fees for rendering of medical services as in the case of clinics and hospitals;
iii. Legal fees for rendering legal services as in the case of law firms;
iv. Room revenue, Room service revenue, Events revenue, Activities revenue, Spa fees and
Parking fees for the services rendered in the hospitality industry
v. Theme Park Admissions for theme parks; Ticket Sales for theaters; and others

ii. Rent revenue – those earned from renting out commercial space or land to other parties.
iii. Interest revenue – those earned for lending money.
iv. Commission revenue – those earned by brokers and travel agencies.
v. Sales – revenue earned by both merchandising and manufacturing companies for selling goods to
customers. The account may be further classified into more specific types such as Restaurant
sales, Bar sales, Gift shop sales for hotels with restaurants or simply restaurants

a. Sales Returns and Allowances – A contra-revenue account that refers to the sales price
adjustments due to customer returns by reasons of defect, inferior quality or not in accord
with customer specifications.

b. Sales Discount - A contra-revenue account that refers to the reductions in the invoice price
by reason of customer’s early payment. E.g. 2/10, 1/20, n/30. This means that if the
customer settles his/her account balance within 10 days, he/she will get a discount of 2%,
1% if within 20 days and the due date of the account is 30 days (no discount).

 Trade Discount - A trade discount is the reduction in price a seller gives a buyer when they buy
a product or group of products. This is given for promotional reasons and is not recorded in the
books. Only the net amount (amount less trade discount) is recorded.

ii. EXPENSES

i. Cost of Sales/Cost of Goods Sold

a. Purchases – The cost of the merchandise inventory/raw materials bought which is resold or
converted to finished goods before it is sold.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

a. Purchase Returns and Allowances – A contra-expense account that refers to the purchase price
adjustments due to customer returns by reasons of defect, inferior quality or not in accord with
the company specifications.

b. Purchase Discounts – A contra-expense account that refers to the reductions in the invoice
price by reason of the company’s early payment.

b. Freight-in/Transportation-in – the cost of transporting items bought for resale from the
supplier to the company.

ii. Operating Expenses

a. Advertising expense – cost of advertising the company or its products in any form or media.
b. Delivery expense/Freight-out/Transportation out – cost of delivering the items ordered/
purchased to the buyer
c. Communication expense – mobile phone/telephone/fax/internet charges, mail, etc.
d. Salaries expense – cost of labor rendered by employees
e. Supplies expense – cost of paper, pen, ink, folder, stationary, soap, etc. It may be termed
differently based on its nature such as Office Supplies Expense, Janitorial Supplies
Expense, Medical Supplies Expense, etc.
f. Rent expense – cost of renting or leasing space on a building or on a land for the business.
g. Repairs and Maintenance – cost of repairs and maintenance of company assets which
includes the materials used and labor.
h. Utilities – electricity and water consumption
i. Taxes, permits and licenses – those paid to secure business permit, regulatory fees and
license to do business or practice a profession.
j. Insurance - is the cost of insurance (on properties, personnel. Etc.) that has been incurred
or has expired.
k. Finance costs/Interest expense – cost of loans/borrowings
l. Doubtful Account expense/bad debts expense
m. Depreciation expense
n. Amortization of intangible assets
o. Impairment Loss
p. Other miscellaneous expense

iii. Other Expense – E.g. Losses due to calamities or loss on sale of assets, etc.

 Expenses may be also classified according to function of expense depending on the industry
the business belongs. For instance: Room Cost (cleaning, laundry, supplies, others); F & B
(payroll, food cost, beverage cost, others) for hotels

CONTRA ACCOUNT – An account used to reduce the value of its related account. Examples are as follows:

i. Contra Account in the Balance Sheet (Statement of Financial Position)

a. Allowance for doubtful accounts (contra-asset against Accounts Receivable)
b. Accumulated Depreciation (contra-asset against Fixed Assets)
c. Accumulated Amortization (contra-asset against Intangible Assets)
d. Accumulated Impairment loss (contra-asset against assets)
e. Owner, Drawing (contra capital against Capital account)

ii. Contra Account in the Income Statement (Statement of Comprehensive Income)

a. Sales Returns and Allowances (contra revenue against Sales)
b. Sales Discounts (contra revenue against Sales)
c. Purchase Returns and Allowances (contra expense against Purchases)
d. Purchase Discounts (contra expense against Purchases)

The Accounting Cycle/ STEPS:

i. Gathering and analyzing business documents
ii. Journalizing
iii. Posting to the Ledger
iv. Preparing a pre-closing trial balance
v. Gather data for adjustments
vi. Journalize and post adjusting entries
vii. Journalize and post closing entries
viii. Prepare post-closing trial balance
ix. Prepare a worksheet
x. Prepare the Financial Statements
xi. Double rule ledgers of Nominal/Temporary accounts with zero balances
xii. On the next accounting period: Journalize and post reversing entries (optional)
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

I. RECORDING PHASE

Business Forms/Papers and Documents – Are original source materials evidencing transactions, used as a
basis for recording.

TYPES OF BUSINESS FORMS AND DOCUMENTS:

i. Official Receipt (OR) – This is issued as evidence when cash is received by the business for sale of
goods and services. It is also called Collection Receipt, Acknowledgment Receipt or Cash Invoice.
ii. Disbursement Voucher (DV) – This is used when cash/check is paid by the business for purchases and
payments for other expenses.
iii. Checks – This is a written order to a bank (drawee) by a depositor (drawer) to pay a specified amount
from the account of the person named in the check (payee).
iv. Sales Invoice (or just plain Invoice) – a commercial document that itemizes and records a transaction
between a buyer and a seller. It identifies both the trading parties and lists, describes, and quantifies
the items sold, shows the date of shipment and mode of transport, prices and discounts (if any), and
delivery and payment terms.
v. Statement of Account (SOA) – Also called a bill, presented to a client or customer showing the billings
to and payments from the customer during a specific time period, resulting in an ending balance.
vi. Promissory Note – A written promise to pay a certain sum of money at a future date signed by the
maker who is debtor. The Payee is the creditor.
vii. Purchase Order – A document which is the first official offer issued by a buyer to a seller indicating
types, quantities, and agreed prices for products or services.
viii. Delivery Receipt – A document evidencing the delivery of goods ordered.
ix. Bank Statement – It is a record, typically sent to the account holder every month, summarizing all the
transactions in an account throughout the time from the previous statement to the current one.

JOURNAL
 It is one of the books of accounts where business transactions are recorded for the first time that is why
it is known as the Book of original entry.
 Its function is to provide a permanent and complete record arranged in chronological order (based on
date) of all accountable transactions.
 The routine and mechanized process of recording transactions in the journal is called Journalizing.
 Parts of a journal entry:
o The date of the transaction
o The account/s to be debited and its amount/s
o The account/s to be credited and its amount/s (slightly indented to distinguish it from the debit
entries)
o The explanation which consists of a short description of the transaction and computation of the
amounts when necessary. For uniformity purposes, the following infinitives are used to start the
explanation for the different types of transactions:
o To record/recognize… (for regular journal entries)
o To adjust… (for adjusting entries)
o To reverse… (for reversing entries)
o To correct… (for correcting entries)
o To close… (for closing entries)
o The Folio where a Post Reference is placed to determine the type of ledger and page each
account in the journal entry has been posted. In the example in illustration1, GL-1 means
General Ledger page 1.

STEPS/PROCEDURE IN RECORDING A JOURNAL ENTRY (in the General Journal)

i. Determine if the transaction/event is accountable (see characteristics of an accountable transaction). If it

is, identify the accounts involved in the transaction.
 There should be a minimum of 2 accounts following the double entry bookkeeping system
 The account names/titles are found in the Chart of Accounts. No account name/title should be used
if it is not found in the chart of accounts.
 3 types of journal entry:
o Simple – One debit and one credit
o Compound – One debit and More than one credit or Vice Versa
o Complex – More than one debit and more than one credit
ii. Determine the types of the accounts identified
 Classify the accounts identified based on what major account (A, L, C, E, R, W) they belong.
iii. Apply the rules of Debit and Credit to determine which account/s is to be debited and credited.
iv. Check the equality between the total debit and the total credit entry amounts
v. Complete the journal entry by placing the date and a short explanation of the transaction.
Computation, if necessary is also placed under the explanation.

FILLING-OUT MONEY COLUMNS

FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

Illustration 2: Filling the money columns

 In filling-out money columns in the journal, the figures are
flushed to the left.
 There is no need to place separators such as commas (,) or
decimal points (.). The placement of the figure in the columns
will define its notation as shown in figure 2 on the left.
 In case the figure is a whole number, there is no need to place
zeros (00) on the centavos column. Instead, a dash (-) is
placed.
 The first figure in illustration 2 reads: Six hundred twenty five
thousand eight hundred forty seven pesos and thirty one
centavos. The second figure is twenty million and the third
figure is two hundred fifty pesos and fifty centavos.

Types of Journals:
i. General Journal
 “A catch all journal.” It is where transactions that cannot be recorded in any special journal is recorded.
It is also where correcting, adjusting, reversing and closing entries are recorded. A sample is shown on
the next page (Illustration 1).

Illustration 1: Sample General Journal (using a 2-column worksheet) with some illustrative journal entries

ii. Special Journals

 Journals used to record repetitive or high volume of specific type of transactions that would otherwise
overwhelm the general journal. It aids in the manual recording of transactions. Special journals are not
mandatory. They may be used depending on the specific needs of a company.

Types of special journals:

a. Purchases Journal

– Used to record purchases of merchandise for sale and acquisition of fixed assets or supplies
on account or on credit. Any transaction entered into the purchases journal involves a credit
to the accounts payable account column and a debit to the appropriate account column to
which the purchase relates. In the example shown on Illustration 3, the most common debit
accounts are Purchases, Freight-in and Supplies. If the transaction involves other debit
accounts besides those three, they are entered under the “sundry” (meaning others) column
and identified (its account name/title) under the “account” column beside it. For instance, the
purchase of Office Equipment on account amounting to ₱ 80,000 from Woodchuck Woodworks.

Illustration 3: Sample Purchase Journal

b. Cash Payments Journal

– Used to record payments of various expenses and liabilities on cash. Any transaction entered
into the cash payments journal involves a credit to the cash account column and purchase
discount, if any, and a debit to the appropriate account column to which the payment relates. In
the example shown on Illustration 4, the most common debit accounts are Accounts Payable,
Purchases, Freight-in and Supplies. If the transaction involves other debit accounts besides
those four, they are entered under the “sundry” (meaning others) column and identified (its
account name/title) under the “account” column beside it. For instance, the payment of
electricity bill amounting to ₱ 2,000 to BENECO (Electricity company).

Illustration 4: Sample Cash Payment Journal

c. Sales Journal

– Used to record sales/revenue transactions on account or credit. Any transaction entered into
the sales journal involves a debit to the accounts receivable account column and a credit to
the appropriate revenue account column to which the sale/revenue relates. In the example
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

shown on Illustration 5, the most common credit accounts are Sales and Service Revenue. If
the transaction involves other credit accounts besides those two, they are entered under the
“sundry” (meaning others) column and identified (its account name/title) under the “account”
column beside it. For instance, the sale of fully depreciated equipment on account amounting to
₱ 1,000 recorded as Miscellaneous Income.

Illustration 5: Sample Sales Journal

d. Cash Receipts Journal

– Used to record receipt of cash arising from sales or services rendered, settlement of accounts,
rebates and refunds from suppliers, loan from banks and investment of owners. Any transaction
entered into the cash receipts journal involves a debit to the cash account column and sales
discount, if any, and a credit to the appropriate account column to which the cash collection
relates. In the example shown on Illustration 6, the most common credit accounts are Accounts
Receivable, Sales and Service Revenue. If the transaction involves other credit accounts
besides those three, they are entered under the “sundry” (meaning others) column and
identified (its account name/title) under the “account” column beside it. For instance, the receipt
of ₱ 500,000 loan from Mayo Bank.

Illustration 6: Sample Cash Receipts Journal

ILLUSTRATIVE PROBLEM

War on Taba Dietary and Consultancy Clinic, a firm owned and managed by Ms. Dabiana Balyena, a professional
nutritionist and dietician, had the following data available in relation to its transactions on February of the current year:

CHART OF ACCOUNTS
WAR ON TABA DIETARY & CONSULTANCY CLINIC

ASSETS LIABILITIES
CURRENT ASSETS CURRENT LIABILITIES
100 Cash 300 Accounts Payable
110 Accounts Receivable 310 Notes Payable
115 Allowance for Doubtful Accounts 320 Mandatory Contributions Payable
120 Notes Receivable 330 Withholding Tax Payable
130 Prepaid Office Supplies 340 Accrued Adverting Payable

140 Prepaid Medical Supplies 350 Accrued Rent Payable

150 Prepaid Advertising 360 Accrued Salaries Payable
160 Prepaid Rent 370 Accrued Interest Payable
NON-CURRENT ASSETS 380 Accrued Communications Payable
200 Fixed Assets 390 Accrued Utilities Payable
205 Accumulated Depreciation – Fixed Assets 400 Unearned Consultancy Fees
EXPENSES NON-CURRENT LIABILITIES
600 Salaries Expense 450 Loans Payable
610 Communications Expense 460 Other Non-Current Liabilities

620 Utilities Expense CAPITAL AND DRAWINGS

630 Office Supplies Expense 500 Balyena, Capital
640 Medical Supplies Expense 505 Balyena, Drawings
650 Advertising Expense 510 Income and Expense Summary
660 Rent Expense 520 Prior Year Adjustment
670 Interest Expense REVENUES
680 Transportation Expense 800 Consultancy Fees
690 Employer Mandatory Contributions Expense 810 Interest Income
700 Depreciation Expense 820 Other Miscellaneous Income
710 Doubtful Accounts Expense
720 Other Miscellaneous Expense

BEGINNING BALANCES:
Cash 25,000 Accounts Payable 20,000
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

Accounts Receivable 5,000 Notes Payable 40,000

Fixed Asset 160,000 Balyena, Capital 100,000
Less: Accumulated Depreciation-FA (30,000) 130,000
TOTAL ASSETS 160,000 TOTAL LIABILITIES AND CAPITAL 160,000

Feb. 1 Ms. Balyena deposited ₱ 210,000 to the bank account of the company as additional investment.
- Ms. Balyena invested a computer set costing ₱ 51,000 to the company.
Feb 2 Purchased a modern body fat measuring machine costing ₱ 142,000 from Tabachingching Co. Terms, ₱ 42,000
to be paid in cash and the balance to be paid after 5 months evidenced by a promissory note with a 5% interest.
Feb. 3 Bought office supplies on account from SanTiong Dept. Store ₱ 2,250.
- Paid 3 months advertising in advance covering February, March and April for a total of ₱ 30,000 @ 10,000 per
month in a local newspaper – Tabalits Inc.
Feb 5 Rendered consultancy services to a customer Ms. Ann Rhexa Nerbyosa, on account, ₱ 5,000.
Feb 6 Bought various medicines, surgical gloves, cotton, tissue paper and other medical supplies for cash, ₱ 2,500.
Feb 8 Received cash for services rendered: preparing a diet plan for Mr. Majin Boo worth ₱ 8,000 for him to gain weight.
Feb 12 Ms. Balyena withdrew ₱ 8,000 from the business due to an emergency.
Feb 14 Paid the salary of the employee for the first half of the month, ₱ 7,000 with deductions as follows: SSS – 400, Phil
Health – 300, and PAG-IBIG – 100.
- The employer counterpart of the mandatory are as follows: ₱ SSS – 450; Phil Health – 300 & PAG-IBIG – 100.
The company will pay and remit the employee shares.
Feb 17 Collected half of the amount owed by Ms. Nerbyosa in the transaction last Feb. 5.
- The business celebrated the birthday of the owner and bought food charged to the company, ₱ 2,000.
Feb 18 The company billed Naughty Elementary School for nutritional counseling services rendered for the school
children and employees, ₱ 120,000. The school issued a promissory note to settle the amount in 1 month.
Feb 21 Paid all the amount owed to SanTiong Dept. store in connection to the supplies purchase transaction last Feb. 3.
Feb 22 Received ₱ 10,000 as advance payment from Mr. Buday Chan. The service will be performed next week.
- Paid ₱ 5,000 for the travel expenses of the owner for a business trip to Manila.
Feb 25 Received a bill from BENECO amounting to ₱ 721.25.
Feb 26 Paid the telephone bill received from DIGITEL amounting to ₱ 2,000.
Feb 28 Salaries of the employees for the next half of the month will be paid on March 1 as Feb. 28 is a Sunday. A
deduction of ₱ 250 is made for the income tax of the employee to be remitted to BIR.
- The company remits the SSS, Phil-Health & PAG-IBIG employee share and the income tax withheld as well as
the employer counterpart to the concerned government agencies.
REQUIRED: Record the transactions in a 2 column journal in good form. Use the accounts found in the chart of accounts.
Illustration 7: General Journal Entries for the illustrative problem: War on Taba Dietary and Consultancy Clinic

PRACTICE PROBLEM

Luigi Plumbing Services, a firm owned and managed by Mr. Mario Luigi had the following transactions completed during
January of the current year:
CHART OF ACCOUNTS
LUIGI PLUMBING SERVICE

ASSETS LIABILITIES
CURRENT ASSETS CURRENT LIABILITIES
100 Cash 300 Accounts Payable
110 Accounts Receivable 310 Notes Payable
115 Allowance for Doubtful Accounts 320 Mandatory Contributions Payable
120 Notes Receivable 330 Income Taxes Payable
130 Prepaid Supplies 340 Accrued Insurance Payable

140 Prepaid Rent 350 Accrued Rent Payable

150 Prepaid Insurance 360 Accrued Salaries Payable
160 Prepaid Advertising 370 Accrued Advertising Payable
NON-CURRENT ASSETS 380 Accrued Interest Payable
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

200 Furniture and Fixtures 390 Accrued Communications Payable

205 Accumulated Depreciation – Furniture and Fixtures 400 Accrued Utilities Payable
210 Transport Vehicle 410 Unearned Plumbing Fees
215 Accumulated Depreciation – Transport Vehicle NON-CURRENT LIABILITIES

220 Plumbing Equipment 450 Loans Payable

225 Accumulated Depreciation – Plumbing Equipment
230 Other Non-Current Assets CAPITAL AND DRAWINGS
EXPENSES 500 Luigi, Capital
600 Salaries Expense 505 Luigi, Withdrawal
610 Communications Expense 510 Income and Expense Summary
620 Utilities Expense REVENUES
630 Plumbing Supplies Expense 800 Plumbing Fees
640 Insurance Expense 810 Interest Income
650 Rent Expense 820 Other Miscellaneous Income
660 Interest Expense
670 Repairs and Maintenance Expense
680 Employer Mandatory Contributions Expense
690 Fuel and Lubricants Expense
700 Doubtful Accounts Expense
710 Depreciation Expense
720 Other Miscellaneous Expense

Jan. 1 The company borrowed ₱ 500,000 from Rural Bank of Timbukto payable on installment basis every year for the
next 5 years. The loan is subject to an interest of 10%,
2 The company rendered services to Ms. Myn Chin for ₱ 50,000. The company installed the plumbing system of her
house which is under construction. She initially paid ₱ 20,000 and issued a promissory note for the balance.
- Mr. Luigi invested a pick-up truck worth ₱ 300,000 and plumbing machines worth ₱ 250,000 to the business.
3 The company paid ₱ 20,000 to insure the newly bought pick-up truck.
4 The company bought various plumbing supplies on account amounting to ₱ 22,250 from Banbantay Hardware.
5 The company bought cabinets, chairs and tables amounting to ₱ 85,000 from Karpintero Inc. The company paid ₱
25,000 as down payment and the balance to be paid at after 3 months evidenced by a promissory note.
6 The company received cash for plumbing services rendered, ₱ 27,000.
7 The company paid a total of ₱ 7,500 for the business permit, clearances, and other fees to register the business.
8 The owner withdrew ₱ 8,000 from the business for an emergency. He was hospitalized due to a minor accident.
10 The company paid the rent for January until March totaling ₱ 45,000. The monthly rent is ₱ 15,000.
12 The company settled its account with Banbantay Hardware in connection with the transaction last Jan. 4.
15 Ms. Peppa Big availed of the services of the company on account for ₱ 2,000 to repair the clogged comfort room
of her house.
16 The company received an advance payment of ₱ 10,000 from Mr. Ram Yun for plumbing services to be
performed on his house next month.
17 Received the payment of Ms. Myn Chin amounting to ₱ 30,000 in relation to the transaction last Jan. 2.
20 The company received the telephone bill from Kumunikasyon Corp. for the month amounting to ₱ 1,499. The
company intends to pay it on its due date on Feb. 20.
23 The company paid ₱ 2,500 for the fuel of the truck being used by the company.
25 The company paid the electricity and water bill for the month amounting to ₱ 1,500 and 600 respectively.
27 Collected the payment of Ms. Peppa Big in connection to the transaction last Jan. 15.
28 The company paid ₱ 20,000 to Karpintero Inc. representing the first installment payment for the purchased
furniture and fixtures last Jan. 5.
31 The company paid the salary of the employees, P 36,000 with deductions as follows: SSS – ₱ 1,150, Phil Health
– 750, PAG-IBIG – 300, Income tax – 600.
- The employer counterpart of the mandatory contributions are as follows: SSS – ₱ 1400; Phil Health – 750 & PAG-
IBIG – 300. The company will pay them and remit the employee share on the due date of Feb. 10.

REQUIRED: Record the transactions in a 2 column journal in good form. Use the accounts found in the chart of accounts.
II. CLASSIFYING PHASE

Chart of Accounts
 Contains the list as well as codes used for all the accounts being used by the company.

LEDGER
 A record of the entire group of accounts maintained by a company.

Posting - The process of transferring the information from the journal to its appropriate accounts in the ledger
in a systematic manner.

Footing - The process of totaling the ledger account balances.

STEPS IN POSTING TO THE LEDGER (follow the arrows in illustration 7)

FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

i. The date is entered in the date column of the ledger following the date of the journal entry.
ii. The debit amount/s from the journal are transferred to the debit side of the appropriate account’s
ledger/s.
iii. The credit amount/s from the journal are transferred to the credit side of the appropriate account’s
ledger/s.
iv. The Post Reference column in the ledger for each account is filled by using an alpha-numeric code
which will identify the journal and page where the information was taken. In the illustration, the code
GJ-1 means General Journal, Page 1. Other codes may be used depending on the company.
v. The Post Reference column in the journal for each account is filled by using an alpha-numeric code
which will identify the ledger and page where the account was posted. In the illustration, the code GL-1
means General Ledger, Page 1. Other codes may be used depending on the company.
vi. The particulars column may be filled to give a brief explanation to the posted amount, similar to the
explanation in the journal entry. Oftentimes, it is filled only when necessary by reminders or when the
transaction is unique.

Illustration 7: Posting from the General Journal to the General Ledger

Types of Ledgers:

i. General Ledger
 The main ledger used to summarize amounts from the general journal.

Illustration 8: The General Ledger with some illustrative postings (using War on Taba Consultancy and Dietary
Clinic journal entries)
5

Other ledgers may have other format such as the one presented below:
4 2
1
Illustration 9: Another format of the General Ledger (illustrating the mandatory contributions payable account
shown above)

ii. Special / Subsidiary Ledger

 Ledgers used to break down an account with many details such as Accounts payable (names 3 of
creditors), accounts receivable (names of customers), fixed assets (types of fixed assets), etc.

Examples of special ledgers:

a. Accounts Receivable Subsidiary ledger/ Customer’s ledger

o A group of ledgers containing the names of company customers and amounts
collectible/receivable from them as well as current balances.
o The total of all the balances for all these ledgers should equal with the amount in its related
controlling account (Accounts Receivable)
b. Inventory Subsidiary ledger
 A group of ledgers containing the different types of inventory of the company yet to be sold
or processed and their corresponding amounts.
 The total of all the balances for all these ledgers should equal with the amount in its related
controlling account (Inventory). Merchandise Inventory for a merchandising business or
Raw Materials Inventory, Goods in Process Inventory and Finished Goods Inventory for a
Manufacturing Business

c. Fixed Asset or Property Plant and Equipment Ledger

 A group of ledgers containing the different classes of Fixed Assets or PPE that the company
maintains and their corresponding amounts.
 The total of all the balances for all these ledgers should equal with the amount in its related
controlling account (Fixed Assets or PPE).

d. Accounts Payable Subsidiary ledger/ Creditor’s ledger

o A group of ledgers containing the names of company suppliers and the amounts owed or
payable to them as well as current balances.
 The total of all the balances for all these ledgers should equal with the amount in its related
controlling account (Accounts Payable)

e. Other Accounts which the company may find necessary to further classify into details.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

Illustration 10: Sample general ledger selected accounts with subsidiary ledgers

Illustration 11: General Ledger postings for the illustrative problem: War on Taba Dietary and Consultancy
Clinic. (Found on the next page)
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

Trial Balance
 A document which is used to test and ensure the equality between total debits and credits after
transactions have been posted. The trial balance is not a mandatory report as its mere function is to
check equality but it cannot determine other errors such as:
i. Failure of recording 1 or more transactions
ii. Failure to post 1 or more journal entries
iii. Recording a transaction more than once
iv. Posting 1 or more journal entry more than once
v. Recording an erroneous amount on both Dr and Cr side of the journal
vi. Posting part of an entry as Dr or Cr but to the wrong account

Types of Trial Balance

i. Pre-closing trial balance
 It includes balances of both nominal/temporary and real/permanent accounts. It is prepared prior to
the preparation of closing entries.
a. Unadjusted Trial Balance – Prepared before adjusting entries are recorded in the general
journal and posted in the general ledger.
b. Adjusted Trial Balance – Prepared after all adjusting entries are recorded in the general
journal and posted in the general ledger.
ii. Post-closing trial balance
 It is a listing of all balance sheet (statement of financial position) accounts containing non-zero
balances at the end of a reporting period. It contains only real/permanent accounts as the
nominal/temporary accounts have already been closed.
 Prepared after all closing entries are recorded in the general journal and posted in the general
ledger.

Illustration 12: Unadjusted Trial Balance using illustrative problem: War on Taba Dietary & Consultancy
Clinic

III. SUMMARIZING PHASE

CLASSIFICATION OF ACCOUNTS:

i. Real/Permanent Accounts – Includes all balance sheet accounts except owner’s drawing/withdrawal.
They are called real accounts because their ending balances are not brought to zero at the end of the
accounting period but carried forward to the next period.

ii. Nominal/Temporary Accounts – Includes all income statement accounts including owner’s
drawing/withdrawal. They are called temporary accounts because they only relate to the current
accounting period and their balances are eventually transferred to capital accounts thus bringing their
balances to zero at the end of the accounting period.

iii. Mixed Accounts – Composed partly of real and temporary accounts.

a. Asset and expense accounts (prepayment of expense & accrual of expense)
b. Liability and income accounts (pre-collection of revenue & accrual of revenue)

ADJUSTING ENTRIES

 Ideally, all transactions must be recorded on the day of occurrence. However, there are accountable
events that are not immediately journalized. For instance, use of supplies and earning of wages by
employees are not journalized daily because it is inexpedient to do so. Some costs are not journalized
during the accounting period because these costs expire with the passage of time rather than as a
result of recurring daily transactions, also, due to numerous transactions in a day, the record keeper
may have unintentionally failed to record certain business transactions. To include these transactions in
the books of accounts before financial statements are finally prepared, adjusting entries are necessary.
This is to ensure that the revenues are recorded in the period when they are earned and all expenses
are recognized in the period when they are incurred. This is in accordance with the accrual and
periodicity assumptions. Its purpose is summarized as follows:

i. Break down Mixed accounts into their real/permanent and nominal/temporary components at the
accounting period cut-off date. (Last day of the accounting period).
ii. Segregate portion of Expense incurred for the current accounting period and the next.
iii. Segregate portion of Revenue/income earned for the current accounting period and the next.

 Adjusting entries are general journal entries done at the end of the accounting period to split mixed
accounts and to bring the accounts up to date for the purpose of measuring the Results of operations
and financial position as fair and accurate as possible. All adjusting entries affect at least one balance
sheet account and one income statement account. The easiest way to know when an adjusting entry is
needed is by familiarizing oneself with the six instances that normally require adjustments:
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

1. Prepayment of Expenses 4. Accrual of Income

2. Precollection of Income 5. Provision for Depreciation Expense
3. Accrual of Expenses 6. Provision for Doubtful Accounts Expense

 Adjusting Entries are also posted in the general ledger just like other journal entries.

Provision for Depreciation Expense

 When an enterprise purchases a fixed asset, it is in effect paying for the usefulness of that non-current
asset in advance for as long as it benefits the business organization. Thus, the amount paid to acquire
this kind of asset must be deferred and allocated over the period benefited or its estimated useful life.
The cost of a fixed asset allocated to a certain period is known as Depreciation Expense. Like any other
expense, depreciation expense is incurred during an accounting period to generate revenue. Here's
another way of viewing depreciation: Generally, Nothing lasts forever even for fixed assets. Due to
certain physical factors like wear and tear and exposure to wind, rain sun and other elements and also
functional or economic factors including obsolescence and inadequacy, the value and usefulness of
fixed assets decrease as time passes. It will reach a point when it becomes no longer useful, thus its
life is said to have ended. Because of the limited life of these tangible assets, their costs should be
distributed as expenses over the years they benefit. It should be noted that all fixed assets depreciate
except for land and art collections whose value and usefulness generally does not decrease.

 The adjusting entry to record depreciation expense is:

Depreciation Expense XXX
Accumulated Depreciation XXX
 There are many ways of computing for depreciation expense but the simplest is the straight line
method with its formula given below as:

Depreciation Expense = Cost - Salvage Value

Estimated Useful Life

Where: Cost = Purchase price plus incidental costs necessary in acquiring and bringing the asset to its
intended use
Salvage Value/Residual Value = Estimated amount to be received once the asset is disposed
off when it has already reached its useful life.
Estimated Useful Life = Approximate length of time within which the asset is expected to be
used.

 Depreciation Expense is presented in the Statement of Comprehensive Income (Income Statement) as

part of Operating Expenses.
 Its partner account, the Accumulated Depreciation Account, is a contra-asset account that is presented
in the Statement of Financial Position (Balance Sheet) as a deduction from the related Fixed Asset or
PPE account.
 The number of Accumulated Depreciation Accounts depends on the number of depreciable assets.

Provision for Amortization of Intangible Asset (similar to depreciation expense for intangible assets)

 The cost of long term assets such as Intangible assets are spread to its estimated useful life also using
the straight line method similar with that used in computing depreciation expense.

Provision for Doubtful Accounts Expense

 Doubtful Accounts Expense (also known as Bad Debts Expense and Uncollectible Accounts Expense)
are expenses incurred for the failure to collect accounts receivable. The estimation the amount to be
recorded as doubtful accounts expense is normally based on the experience of the company or of the
industry to which the company belongs. Indicators like declaration bankruptcy of a customer; closure of
business; the customer's and failure of repeated attempt to collect are also taken into consideration.
The adjusting entry to provide for Doubtful Accounts Expense is:

Doubtful Accounts Expense XXX

Allowance for Doubtful Accounts XXX

 The computation of Doubtful Accounts expense may be in using a percentage that is based on
company experience, multiplied by the outstanding accounts receivables or total credit sales.
 Doubtful Accounts Expense is presented in the Statement of Comprehensive Income (Income
Statement) as part of Operating Expenses.
 Its partner account, the Allowance for Doubtful Accounts, is a contra-asset account that is presented in
the Statement of Financial Position (Balance Sheet) as a deduction from Accounts Receivable.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

EXERCISE ON JOURNALIZING ADJUSTING ENTRIES

For the adjusting entry illustrations 1-6 below, we will use the data of Mr. Boy Bakal’s ““Man of Steel Auto Repair
Shop.” Here are some selected transactions for the current year. Assume that the company uses the calendar
year accounting cycle and so financial statements will be prepared on Dec. 31, 202X.

i. Pre-collection of revenue/income (collection/receipt of payment from customer in advance)

On Dec. 5, the company collected advance payment from Mr. Big amounting to ₱ 10,000.00 for
services to be performed on his Toyota car on Dec. 20, 202X.
 Give the adjusting entry on Dec. 20, when the business completes the repair services for Mr.
Big.
 Give the adjusting entry on Dec. 20, when the business completes the repair services for Mr.
Big but the total Invoice cost is ₱ 15,000.00
 Give the adjusting entry on Dec. 20, when the business completes the repair services for Mr.
Big but the total Invoice cost is ₱ 8,000.00
 Give the adjusting entry in case Mr. Big cancels his plan to bring his car on Dec. 20.
 Give the adjusting entry on Dec. 31, when the business has not yet completed the repair
services for Mr. Big.

ii. Pre-payment of expense (advance payment of an expense)

On Dec. 10, the company bought repair supplies amounting to ₱ 3,000.00.

 Give the adjusting entry on Dec. 31 in case all the repair supplies bought were consumed as of
Dec. 31
 Give the adjusting entry on Dec. 31 in case none of the repair supplies bought were consumed
as of Dec. 31
 Give the adjusting entry on Dec. 31 in case only ₱ 1,200.00 of ₱ 3,000.00 repair supplies bought
were consumed as of Dec. 31.

iii. Accrual of Income (Revenue/income already earned but not yet collected)

On Dec. 28, the company started repairing the car of Mr. Long.
 Give the Adjusting entry as of Dec. 31, where the company was not able to finish the repairs. It is
estimated that ₱ 15,000.00 is the worth of the completed services out of the ₱ 20,000.00 total repair
service cost.

iv. Accrual of Expense (Expenses already incurred/used/consumed but not yet paid)

On Dec. 31, the company defers payment of its ₱ 10,000.00 rent bill to be paid on Jan. 3, the next year.
 Give the Adjusting entry as of Dec. 31.

v. Provision for Depreciation (This represents the wear and tear of company fixed assets due to usage
or passage of time).

On Oct. 1, the company bought repair machine worth ₱ 52,000.00 and furniture and fixtures worth ₱
21,000.00 on cash.
 Give the Adjusting entry as of Dec. 31 for the depreciation of the assets acquired assuming that the
estimated useful life of the repair machine is 5 years while the furniture and fixture is 10 years. The
estimated salvage/ residual value of the machine is ₱ 2,000.00 while the furniture and fixture is ₱
1,000.00. The company uses the straight line method of depreciation. Assume the following
independent cases:

i. No policy on timing of depreciation.

ii. It is the company policy to depreciate its assets on a full year basis on the year of
acquisition.
iii. It is the company policy to depreciate its assets on a full year basis a year after acquisition.

vi. Provision for doubtful accounts or bad debts (This represents possible uncollectible receivables
from credit customers.)

On Dec. 31, the company has total Accounts receivable of ₱ 85,000 and total Service Revenue of ₱
250,000 for the year. (The aging shows the following breakdown of the accounts receivable: 1-180
days is ₱ 30,000; 181-365 day is ₱ 20,000 and over a year is ₱ 35,000)
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

 Record the provision for doubtful accounts or bad debts using the following bases:
i. The company uses Aging of receivables. (assume a 1% for1-180 days, 2% for 181-365 days
and 5% over 1 yr.)
ii. The company uses % of Receivables. (assume a 3% rate)
iii. The company uses % of Services Revenue. (assume a 1% rate)

Recall our illustrative problem for the company War on Taba Dietary and Consultancy Clinic. Let’s prepare the
adjusting entries as of Feb. 28, 202X assuming that a monthly Financial Report is to be prepared (adjust the
computed depreciation and doubtful accounts to one month). The following are the additional data gathered:

 As of Feb. 28, month-end inventory reveals that only ₱ 250 worth of office supplies remains unused
while all of the medical supplies were used-up.
 On Feb. 25, the company started the rendering services to a group of athletes preparing for a
competition. It involves a one week diet program to be provided by the company. The service costs ₱
20,000.
 On Feb. 28, the company completes the consultancy service for Mr. Buday Chan. However, the total
cost of service decreased by ₱ 4,000 since he requested for a 2 month diet plan instead of his initial 4
month intended plan.
 On Feb. 28, the company has yet to receive the rent bill from the Landlord. The monthly rent for the
business space rental is ₱ 8,000.
 The estimated useful life of all fixed assets is 10 years. The beginning balance of fixed asset (medical
equipment) has no salvage value. The salvage value of the Computer is ₱ 1,000 while that of the body
fat measuring machine is ₱ 2,000. The company uses the straight-line method of depreciation and has
no policy on depreciation.
 The company estimates its doubtful accounts using 2% based on revenue (consultancy fees).

Illustration 13: Adjusting entries the illustrative problem on War on Taba Dietary and Consultancy Clinic:

CORRECTING ENTRIES

 These are general journal entries used to correct erroneous journal entries made in the past. They are
prepared only when errors are discovered.

i. Correcting entries affecting PERMANENT/REAL ACCOUNTS – Corrections on permanent/real

accounts could be made even if they refer to current or prior period/s since the ending balances of
these accounts are not closed at the year end and are carried forward to the next year.

ii. Correcting entries affecting NOMINAL/TEMPORARY ACCOUNTS.

a. Nominal/Temporary accounts affected are within the current year – Corrections can still be
made on the appropriate revenue/expense accounts since the books are still open they
have yet to be closed.
b. Nominal/Temporary accounts affected are in the prior year/s – The corrections should be
booked using the account Prior Period Adjustment, since the prior year/s
nominal/temporary accounts are already closed. Another option is to close it directly to the
Owner’s capital account, since the Prior Period Adjustment account will eventually be closed
to the Owner’s capital account.

 Prior Period Adjustment is a temporary/suspense account used to accumulate data for corrections of
nominal/temporary accounts from prior periods. It is eventually closed to the Owner’s capital account.
After all closing entries are made, it should have a zero balance.

Example 1: Original entry made:

SUPPLIES EXPENSE 2,000.00
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

COMMUNICATIONS EXPENSE 3,500.00

CASH 5,500.00

It was discovered today (the date today) that the correct amount of communication expense is ₱
5,300.00, not ₱ 3,500.00 and that Utilities expense account should have been used instead of Supplies
expense. Prepare the correcting entries for the following independent cases:
i. Assume that the transaction date is July 3 of the current year.
ii. Assume that the transaction date is March 22 of last year.

Example 2: Original entry made:

CASH 5,000.00
ACCOUNTS RECEIVABLE 8,950.00
SERVICE REVENUE 13,950.00

It was discovered today (the date today) that the correct amount of cash received is ₱ 8,950.00 and the
accounts receivable is ₱ 2,000.00. This means that Service Revenue is also overstated by ₱ 3,000.00. Prepare
the correcting entries for the following independent cases:
i. Assume that the transaction date is Nov. 15 of the current year.
ii. Assume that the transaction date is Aug. 8 three years ago.
CLOSING ENTRIES

 These are general journal entries used to close nominal/temporary accounts at the end of the
accounting period. These entries can be prepared after all adjusting entries are recorded and are dated
as of the last day of the accounting period (Dec. 31 for calendar year accounting period). After the
closing entries have been posted, these temporary accounts (All revenues and expense accounts,
including owners’ drawings/withdrawals and Income and Expense Summary Account) have zero
balances, thus they are said to be closed and ready to accumulate data in the next accounting
period.

4 basic closing entries:

i. An entry to close all income statement accounts with credit balances (revenues) to the income and
expense summary account.
ii. An entry to close all income statement accounts with debit balances (expenses) to the income and
expense summary account.
iii. An entry to close the income and expense summary account to the capital account.
iv. An entry to close the Owner’s drawing/withdrawal account to the capital account.

 An entry to close the Prior Period Adjustment, if any, to the capital account.
 The Income and expense summary account is a temporary/suspense account used only to summarize
all income and expense accounts. It is eventually closed to the Capital account. After all closing entries
are made, it should have a zero balance.
 Closing Entries are also posted in the general ledger just like other journal entries. After all closing
entries are made, all temporary/nominal accounts should have zero balances.

Illustration 14: Closing entries for the illustrative problem on War on Taba Dietary and Consultancy Clinic:

WORKSHEET

 It is a working paper that can be used to organize the work done at the end of the accounting period
particularly in summarizing adjusting entries and the account balances for the eventual preparation of
financial statements.
 It is prepared at the end of an accounting period and usually includes a list of accounts, account
balances, adjustments to each account, and each account’s adjusted balance all sorted in financial
statement order. Sometimes additional columns for closing entries and Post-closing Trial Balance may
also be added.
 It is not really required to be done but it merely facilitates the preparation of the financial statements.

The Worksheet for our illustrative problem on War on Taba Dietary and Consultancy Clinic is found on the next
page (page 35).

PREPARE POST-CLOSING TRIAL BALANCE

 It is prepared to check the equality of total debits and credits of all accounts (real/permanent) after
posting all closing entries to the general ledger.
 Once the worksheet has been prepared, the post-closing trial balance would be easy to prepare based
from it.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

Illustration 16: Post-closing Trial Balance for War on Taba Dietary and Consultancy Clinic:
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

Illustration 16: Worksheet for the illustrative problem on War on Taba Dietary and Consultancy Clinic:
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

RULING THE LEDGER ACCOUNTS

 After posting all the closing entries, all nominal/temporary leger accounts, which should have equal
debit and credit balances or zero ending balances, are double ruled. The purpose of ruling them is to
segregate the entries of the old accounting period with that of the new accounting period. Once double
ruled, no more posting can be made to the ledger.
 Ruling of ledger accounts are done at the end of the accounting period. The ledger accounts that
should be double ruled are as follows:

i. All Expense accounts.

ii. All Revenue/income accounts.
iii. Income and Expense Summary account.
iv. Owner’s Drawing account.
v. Prior Period Adjustment account, if any

PREPARING THE FINANCIAL STATEMENTS

 After the Post-closing Trial Balance has been prepared, the financial statements can now be prepared
based on the Worksheet.
 The four basic financial statements are as follows:

i. Statement of Financial Position (Balance Sheet)

ii. Statement of Comprehensive Income (Income Statement)
iii. Statement of Changes in Capital
iv. Statement of Cash Flow or Cash Flow Statement

Illustration 17: The 4 basic Financial Statements of War on Taba Dietary and Consultancy Clinic:

REVERSING ENTRIES

 A general journal entry made at the beginning (first day) of the next accounting period that is the exact
reverse of the closing entry made at the end of the previous accounting period.
 They are OPTIONAL entries intended to simplify the bookkeeping process for transactions involving
certain types of adjustments. Not all closing entries are reversed, only the following closing entries
made could be reversed:

i. Pre-payment of Expense or Deferred charges using the Expense method.

ii. Pre-collection of revenue or Unearned/Deferred revenue using Revenue method.
iii. Accrual of expenses.
iv. Accrual of revenue.
COMPREHENSIVE PROBLEM

“Your Health is Our Wealth Alternative Medical Clinic” is a company owned and managed by Dr. Indian Jones.
The clinic had the following transactions completed during the 1 st quarter of 2019. The company uses a Calendar
Accounting Cycle that ends at Dec. 31.

CHART OF ACCOUNTS
YOUR HEALTH IS OUR WEALTH ALTERNATIVE MEDICAL CLINIC

ASSETS LIABILITIES
CURRENT ASSETS CURRENT LIABILITIES
100 Cash 300 Accounts Payable
110 Accounts Receivable 310 Notes Payable
115 Allowance for Doubtful Accounts 320 Mandatory Contributions Payable
120 Accrued Interest Receivable 330 Income Taxes Payable
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

120 Notes Receivable 340 Accrued Adverting Payable

130 Prepaid Medical Supplies 350 Accrued Rent Payable

140 Prepaid Office Supplies 360 Accrued Salaries Payable

150 Prepaid Rent 370 Accrued Interest Payable
160 Prepaid Advertising 380 Accrued Communications Payable

NON-CURRENT ASSETS 390 Accrued Utilities Payable

200 Other Receivables 400 Unearned Consultancy Fees
210 Furniture and Fixtures
215 Accumulated Depreciation – Fur and Fix. NON-CURRENT LIABILITIES
220 Medical Equipment 420 Loans Payable
225 Accumulated Depreciation – Med. Equip. 430 Other Non-Current Liabilities

230 Office Equipment

235 Accumulated Depreciation – Office Equip. CAPITAL AND DRAWINGS
240 Other Non-Current Assets 510 Jones, Capital
EXPENSES 515 Jones, Drawings
610 Salaries Expense 520 Income and Expense Summary
620 Communications Expense
630 Utilities Expense
640 Medical Supplies Expense REVENUES
650 Office Supplies Expense 800 Medical Fees
650 Advertising Expense 810 Interest Income
660 Rent Expense 820 Other Miscellaneous Income
670 Interest Expense
680 Depreciation Expense
690 Employer Mandatory Contributions Expense
700 Doubtful Accounts Expense
710 Repairs and Maintenance Expense
720 Other Miscellaneous Expense

BEGINNING BALANCES:
Cash 125,000 Accounts Payable 28,000
Accounts Receivable 15,000 Notes Payable 8,200
Prepaid Medical supplies 8,600 Accrued Rent Payable 10,000
Prepaid Office supplies 1,400 Accrued Utilities Payable 1,800
Medical Equipment 500,000 Unearned Medical fees 12,000
Less: Accumulated Dep’n – Med. Eq. (90,000) Jones, Capital 500,000
TOTAL ASSETS 560,000 TOTAL LIABILITIES AND CAPITAL 560,000

TRANSACTIONS for the 1st Quarter (Jan. 1 to March 31, 2019)

Jan 1 Dr. Jones invested additional cash of P 50,000 and hi-tech surgery equipment worth P 560,000 to the clinic.
Jan 3 The clinic buys a set of chairs, tables, beds and cabinets totaling P 175,000 on account from Matibay Woodworks
Co. Terms, P 75,000 down payment and the balance to be paid every month for the next 5 month
evidenced by a promissory note with 12% interest.
Jan 4 The clinic pays P 3,700 for lab gowns, beddings, face masks, curtains and other medical supplies purchased from
Quack Doc Medical Supplies Inc.
Jan 5 Received P 32,000 from various patients/clients for medical consultation services rendered.
Jan 6 Pays the rent for December of last year, P 10,000.
Jan 7 Pays the electricity and water bill for December of last year P 1,800.
Jan 8 The company buys a telephone with fax machine worth P 21,000 for cash from MS Department store.
Jan 10 The clinic performed surgery worth P 10,000 to Ms. Almu Ranas on account.
Jan 12 Paid P 2,500 to a local newspaper for advertisement to be published next month February.
Jan 13 Successfully completed the Operation for Mr. Domeki Sukiyaki, a patient last month whose scheduled surgery
was postponed until today. He has paid P 12,000.00 advance payment last year December.
Jan 15 Pays the salary of the employee (receptionist/secretary) for the 1 st half of the month, P 8,000 less SSS, PhilHealth
and PAG-IBIG deductions amounting to P 450, 350 and 100 respectively. The SSS, PhilHealth and PAG-
IBIG Employer share is P 550, 350 and 100 respectively. It will be remitted to the government
agencies on Feb. 2.
Jan 18 Pays P 15,000 account owed to Medecina Inc. for medical supplies purchased last month.
Jan 23 Dr. Jones withdraws P 15,000 for the personal use.
Jan 24 Received P 25,000 from Mr. Fatty as advance payment for a gall stone removal procedure scheduled next month.
Jan 25 Receives P 5,000 from Mr. Domeki as settlement of his account for medical services rendered to him last Dec. 13
Jan 26 The electricity bill amounting to P 1,200 & water bill of P 500 is received and paid.
Jan 27 The telephone bill amounting to P 2,999 is received and will be paid on its due date on Feb. 10.
Jan 28 Pays the rent for January, P 10,000.
Jan 29 The clinic pays P 1,000 for the repair of a damaged medical equipment.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

Jan 31 Pays the salary of the employee (receptionist/secretary) for the 2 nd half of the month, P 8,000 less income tax
withheld of P 500.
Feb 1 The company pays the first monthly installment for the furniture and fixtures purchased from Matibay Woodworks
Co. last Jan. 3.
Feb 2 The employer and employee SSS, PhilHealth and PAG-IBIG contributions and the Income Tax withheld are
remitted/paid to the government agencies.
Feb 3 The clinic buys various office supplies on credit totaling P 2,500 from Papel Bookstore.
Feb 4 The performs acupuncture services for Ms. Tisa Filipina for P 4,300. She intends to pay after 2 months.
Feb 5 Pays the rent for the month of February, P 10,000.
Feb 10 Pays the telephone bill to DIGITEL, P 2,999..
Feb 11 The clinic collected the full payment of Ms. Almu Ranas of P 10,000 in relation to the transaction last Jan. 10.
Feb 13 The clinic billed Mr. Backpain. for an operation procedure rendered, P 50,000. He issued a promissory note
payable after 1 month.
Feb 14 Loaned P 500,000.00 from Metro de Oro Bank evidenced by a formal loan agreement payable after 2 years with
12% interest per annum..
Feb 15 Pays the salary of the employee (same deductions as in January). The SSS, PHIC and PAG-IBIG share of the
company is the same amount as January.
Feb 17 Received P 19,000 from various patients/clients for medical consultation services rendered.
Feb 20 Received the BENECO bill amounting to P 1,750 and water bill amounting to P 500. It will be paid next week
Feb 26 Paid the telephone bill received from DIGITEL amounting to P 2,000.
Feb 28 Salaries of the employees for the month of February is paid totaling P 25,000 (same deductions of income tax as
January)
Feb 28 The second installment payment for the purchased furniture and fixture is made.
Mar 1 The employer and employee SSS, PhilHealth and PAG-IBIG contributions and the Income Tax withheld are
remitted/paid to the government agencies.
Mar 1 The clinic successfully replaces the left radius and ulna bones of Mr. Marco Pasikat with titanium steel. His left
arm bones were crushed during a motorcycle accident. His total bill is P 250,000. He pays P 50,000 and
issued a promissory note with 10% annual interest for the balance payable after 6 months.
Mar 2 The company settles the account to Papel Bookstore.
Mar 3 Paid the P 5,000.00 advertisement in advance to D-Lite radio station for a duration of 2 months (February and
March).
Mar 4 The scheduled surgery for the removal of gall stones of Mr. Fatty was re-scheduled next week as Mr. Fatty is
having a flu.
Mar 5 Pays the electricity and water bills for February.
Mar 6 The clinic completes 10 sessions of acupuncture services for Ms. Zen Buday that started last January. She pays
P 10,000.
Mar 8 The clinic purchases various medical supplies on account amounting to P 16,700 from Quack Doc Medical
Supplies Inc.
Mar 9 Receives P 22,000 as advance payment from Mr. Boogie for an operation to remove a cyst scheduled next
month.
Mar 15 Pays the salary of the employee (same deductions as in January). The SSS, PHIC and PAG-IBIG share of the
company is the same amount as prior months.
Mar 16 The clinic successfully removes the gall stones of Mr. Fatty (re-scheduled today)
Mar 25 Received a bill from BENECO amounting to P 1,733.50 and water bill of P 500. The company will pay the bill on
its due date – Apr. 10.
Mar 26 Received and paid the telephone bill from DIGITEL amounting to P 2,805.25.
Mar 29 The clinic pays half of the amount owed to Quack Doc Medical Supplies in relation to the transaction last Mar 8.
Mar 30 Ms. Mar-Mari contacted the clinic for a medical procedure appointment the next day (Mar. 31).
Mar 31 Salaries of employees for March are yet to be paid, as today is a holiday. It shall be paid on Apr. 2. Deduction of
withholding tax is the same amount as the previous months.
Mar 31 The third installment payment for the purchased furniture and fixture is made.

REQUIRED:

i. RECORD ALL REGULAR TRANSACTIONS FOR THE QUARTER AS FOLLOWS:

a. Journalize the all transactions for the first quarter 2019. (use a 2 column worksheet)
b. Post the entries in the ledger.
c. Prepare the Unadjusted Trial Balance.

ii. ADJUSTING ENTRIES

a. Record adjusting entries based on the following additional information below.
 The salvage/residual value of the Furniture and fixtures is P 10,000; 1,000 for the office equipment and
60,000 for the new medical equipment. The salvage/residual value of the medical equipment acquired
before is P 50,000.00. It is the company policy to record 1 whole year depreciation on the year of
acquisition for property, plant and equipment (PPE) regardless of acquisition date within the year. The
useful lives of the assets is as follows:
Furniture and Fixtures 15 years
Medical Equipment 10 years
Office Equipment 5 years
 As of Mar. 31, the inventory of all medical supplies and office supplies show unused items worth P
1,200.00, and 400, respectively.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

 As of Mar. 31, the clinic has partially completed the medical procedure for Ms. Mar-Mari. 1 more day is
needed to finish the procedure. The estimated worth of the completed portion of the medical procedure is
P 1,100.
 The percentage of Service Revenue (medical fees) is used in estimating Doubtful accounts. 5% is the
rate based on past experience.
 Adjust/record other accruals/prepayments necessary
o Interest income
o Interest expense
o Rent
o Advertising
b. Post the Adjusting entries in the ledger
c. Prepare the Adjusted Trial Balance.

iii. CLOSING ENTRIES

a. Prepare the closing entries for the quarter. (Assuming that a quarterly financial report will be prepared)
b. Post the Closing entries in the ledger
c. Prepare the Post-closing Trial Balance
d. Double Rule Nominal/Temporary/Suspense Ledger Accounts.

iv. PREPARE THE WORKSHEET (make use of 10 column worksheet)

v. PREPARE THE FOLLOWING BASIC FINANCIAL STATEMENTS:

a. BALANCE SHEET (Statement of Financial Position)
b. INCOME STATEMENT (Statement of Comprehensive Income)
c. STATEMENT OF CHANGES IN CAPITAL

ACCOUNTING FOR MERCHANDISING TYPE OF BUSINESS

 The accounting system for a merchandising business is very much similar to that of a service business.
The difference lies only on the revenue accounts and expenses related to it. Below are some important
terms:

i. Payment terms – In some industries, credit terms include a cash discount of 1% to 3% to encourage
early payment of an amount due. A cash discount is a deduction from the invoice price that can be
taken only if the invoice is paid within a specified time. Sellers call a cash discount a sales discount and
buyers call it a purchase discount. An example of this term is: 2/15, 1/30, n/60. This means that there is
a 2% discount if payment is made after 15 days, a 1% discount after 30 days and the entire invoice is
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

due after 60 days with no discount. Another type of discount is the trade discount (e.g. 10% off or 20%
sale). This is not recorded in the books. Only the net amount is recorded.

ii. Shipping terms – Shipping terms are used to show who is responsible for paying for shipping and when
the title of the goods passes from seller to buyer. To understand how to account for transportation
costs, you must know the meaning of the following terms:
a. FOB shipping point - means “free on board at shipping point”. The buyer incurs all transportation
costs after the merchandise has been loaded on a railroad car or truck at the point of shipment.
Thus, the buyer is responsible for ultimately paying the freight charges.
b. FOB destination - means “free on board at destination”. The seller ships the goods to their
destination without charge to the buyer. Thus, the seller is ultimately responsible for paying the
freight charges.

ACCOUNTS UNIQUE TO A MERCHANDISING TYPE OF BUSINESS

 Purchases – This account is used to record the price of merchandise bought for resale from suppliers.
Contra-expense account related to purchases are as follows:

 Purchase discount – This account is used to record discounts availed when purchasing
merchandise, deducted from gross amount of the purchase.

 Purchase returns & allowances – Purchase returns is used to record the value of those items
bought (partly or wholly) but returned to the seller for some reason (e.g. with defects or not in
accordance with specifications) while purchase allowances is used to record the value of those
items bought with defects or not in accordance with specifications but not returned instead, a price
reduction was availed.

 Sales – This account is used to record the value of merchandise sold to customers. Contra-revenue
account related to purchases are as follows:

 Sales discounts – This account is used to record discounts granted to customers for merchandise
sold, deducted from gross amount of the sale.

 Sales returns & allowances – Sales returns is used to record the value of those items sold (partly or
wholly) to a customer but returned for some reason (e.g. with defects or not in accordance with
specifications) while sales allowances is used to record the value of those items sold with defects or
not in accordance with customer specifications but not returned instead, a price reduction was
availed.

 Inventory – This account is used to record the value of merchandise that remained unsold as of the last
day of the accounting cycle which is determined through an inventory count. It is used to determine the
cost of goods sold or cost of sales for a period.

 Freight-in – This account is used to record delivery expenses incurred by the business in bringing the
merchandise bought to the business premises.

 Freight-out – This account is used to record delivery expenses incurred by the business in delivering the
merchandise sold to the customer.

PRACTICE PROBLEM

Recall our previous practice problem for the business “Royal Chakaness Beauty Parlor & Clinic” owned by Ms.
Osang Nana. Let as assume that aside from rendering various beauty services, the company also sells various beauty
products. The inventory as of Dec. 31 last year is P 25,000. Here are some transactions related to its beauty products:

Jan. 3 The business buys various beauty products such as creams, lotions and ointments from Xinghua Beauty Inc.
based in Manila at an invoice price of P 50,000. The term is 1/15, n/30; FOB destination.
4 The company paid the shipping fee for the goods at P 1,000.
6 The company returned P 5,000 worth of products to Xinghua since they are defective.
10 Sold P 15,000 worth of products to various customers for cash.
11 Sold P 10,000 worth of products to a customer, Ms. Pimples on account. Terms: 2/15, 1/30, n/60; FOB
destination. The shipping cost is P 300.
FUNDAMENTALS OF ACCOUNTING OUTLINE NOTES Prepared by: Dalifer A. Gano,CPA,MBA,MAEd

16 The business buys slimming cream from Thailand at an Invoice price of P 100,000 on cash basis. Terms: FOB
Shipping point.
- The company pays P 5,000 for the shipping fee of the goods from Thailand.
17 The business pays the amount due from Xinghua Beauty Inc.
20 Sold P 20,000 worth of slimming cream to Ms. Tambulalat. Terms: Terms: 2/15, 1/30, n/60; FOB shipping point.
The shipping cost is P 500.
22 Sold P 2,000 worth of products to Ms. Mapili for cash.
23 Ms. Mapili returned P 1,000 worth of products she bought last Jan. 22 since some of them are expired. She was
given a refund for the returned products.
25 The company sold 32,000 worth of products to various customers on cash basis at 20% discount as part of a
marketing promotion.
27 Ms. Pimples pays her balance.
28 Mr. Tisoy demands a price adjustment for a product he bought last Jan. 25 as its seal was broken. The company
gave him a P 200 price deduction in the same day.
29 Ms. Tambulalat settles her account
31 Month end inventory shows all unsold beauty products of the company at P 105,000.

REQUIRED: Journalize the following transactions and compute the gross profit for January.

- End -

When a child tries to walk and falls down 50 times, they never think to
themselves “maybe this isn’t for me”

“What’s 2 + 2?”

ENGINEER: “It lies between 3.09 and 4.02”

MATHEMATICIAN: “In 2 hours I can demonstrate it, equals 4 with the following proof…”
PHYSICIST: “It’s in the magnitude of 1 x 101.”
LOGICIAN: “This problem is solvable”
SOCIAL WORKER: “I don’t know the answer, but I’m glad we discussed this important question.”
ATTORNEY: “In the case of Smith vs. the State, 2+2 was declared to be 4.”
TRADER: “Are you buying or selling?
ACCOUNTANT: “What would you like it to be?”
Dilbert