Accounting is 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 result thereof.
Income Statement Accounts (Temporary/Nominal Accounts)
Income

1. Service Income- In general, this is the account title used for all types of
income derived from rendering of services. Sometimes the account title used
is Service Revenue

2. Professional Income- the account title generally used by professionals for

income earned from the practice of their profession or may be specified as
Accounting or Auditing Fees Income for Accountants, Legal Fees Income for
Lawyers, Dental Fees Income for Dentists, Medical Fees Income for Doctors,
etc.

3. Rental Income- for income earned on buildings, space or other properties

owned and rented out by the business as the main line of its activity.

4. Interest Income- for income received by the business arising from an

amount of money borrowed by a customer or receivable from a customer
because of goods bought on credit. This is evidenced by a promissory note.

Expenses
1. Supplies Expense- this represents cost of supplies that were used and
consumed that bears specific titles as office supplies expense, store supplies
expense, shop supplies expense, etc.

2. Rent Expense- for the amount paid or incurred for use of property, usually
premises.

3. Repairs and Maintenance-for expenses incurred in repairing or servicing

the buildings, machineries, vehicles, equipment, etc., which are owned by the
business.

4. Salaries Expense- for compensation given to employees of a business.

5. Uncollectible Accounts - for the anticipated loss that the business may
incur arising from uncollectible accounts.
6. Depreciation Expense- for the portion of the cost of property and
equipment or fixed assets that has expired based on rational and systematic
allocation procedure.

7. Taxes and Licenses - for the amount paid for business permits, licenses and
other government dues except the Income Tax paid which is not allowable by
law as a deduction.

8. Insurance Expense - account title for the expired portion of the insurance
premium paid.

9. Utilities Expense - the account title for telephone, light and water bills.
Also included are gasoline, lubricants and oil.

10. Miscellaneous Expense - any amount paid as expense which is not

significant enough to warrant a particular classification.

Statement of Financial Position Account titles (Permanent Accounts)

Assets- these are economic resources controlled by an accounting entity that
are expected to provide future benefits. They are property and rights of value
owned by the business. It can be classified as current or non-current. Current
Assets- refer to all assets that are expected to be realized, sold or consumed
within the enterprise’s normal operating cycle.

1. Cash- the account title to describe money, either in paper or in coins and
money substitutes like check, postal money orders, bank drafts and treasury
warrants. When cash is within the premise of the business, the account title is
Cash on Hand and Cash in Bank if deposited in the bank.

2. Petty Cash Fund- the account title for money placed and set aside for petty
or small expenses.

3.Cash Equivalents- No. 22 defines cash equivalents as short-term, highly

liquid instruments that are readily convertible into cash and they present
insignificant risk of changes in values because of changes in interest rates.

4. Notes Receivable- this is a promissory note that is received by the business

from the customer arising from rendering of services, sale of merchandise, etc.
5. Accounts Receivable- the account title for amounts collectible arising
services rendered to at customer or client on credit. This constitutes an oral or
verbal promise to pay by a customer or client.
6. Allowance for Uncollectible Accounts- this is an asset offset or a contra-
asset account. It provides for possible losses from uncollected accounts.
Although this is not actually an asset, it is classified as such because it is
shown as a deduction from the Accounts Receivable which is a Current Asset
Account.

7.Accrued Income- the amount of income earned but not yet collected.

8.Advances to Employees- the account title for amounts collectible from

employees for allowing them to make cash advances which are deductible
against their salaries or wages.

9.Prepaid Expenses- account title for expenses that are paid in advance but
are not yet incurred or have not yet expired such as Prepaid Rental, Prepaid
Insurance, Prepaid Interest, Prepaid Advertising, etc.

10. Unused Supplies- an account title for cost of stationery and other supplies
purchased for use left on hand and still unused.

Non-Current Asset- “all other asset not classified as current should be

classified as non-current assets”.
1. Property Plant and Equipment- these are tangible assets which are held by
an enterprise for use in production or supply of goods and services, for rental
to others, or for administrative purposes, and are expected to be used during
more than one period, such as:
 Land- an account title for the site where the building used as
office or store is constructed.
 Building- account title for a finished construction owned by
the business where operations and transactions took place.
 Machinery and Equipment- includes calculators,
typewriters, adding machines, computers, steel filing cabinets
and the like.
2. Furniture and Fixtures- includes chairs, tables, counters, display
cases and the like.
3. Accumulated Depreciation- this is an asset offset or contra-asset
account. This is called a Valuation Account which is shown as a
deduction from property and equipment.

These assets that are classified as Property & Equipment or Fixed Assets are
called Depreciable Assets and are subject to Depreciation except “land”. Land
is not subject to depreciation because it is expected to be useful to the business
enterprises for an indefinite period of time.

2.Intangible Assets- these are identifiable non-monetary assets without

physical existence.
Examples are patents, copyright, franchise, trademarks, etc.

LIABILITIES- are obligations of an entity that transfer assets or provide

services to other entities in the future as a result of past transactions or events.

Current Liabilities- are financial obligations of the enterprise which are (a)
expected to be settled in the normal course of the operating cycle; (b) due to
be settled within one year from the balance sheet date.

1. Accounts Payable- an account title for a financial obligation of an

enterprise that constitutes an oral or verbal promise to pay.

2. Notes Payable- same as Accounts Payable in nature but only the obligation
is evidenced by a promissory note. The enterprise is the one who issued the
note.

3. Accrued Expenses- these are expenses incurred by the enterprise but are
not yet paid. This normally occurs when the accounting period ended, such as
rent, salaries, interest, taxes payable, etc.
4. Unearned Income- this is an account title for an income collected or
received in advance and is not yet considered as “earned”.

Non-current Liabilities- are financial long term obligations of the enterprise

which are due and payable for more than one year. This usually occurs in a
corporate form of business organization.

1. Notes Payable (long term)- same nature with that of Notes Payable (short-
term)but only, this requires payment for more than one year.

2. Mortgage Payable- a financial obligation of the enterprise which requires a

fixed or tangible property to be pledged as a collateral to ensure payment. This
s usually found in a corporate business organization.
FIVE (5) MAJOR ACCOUNTS:

1. Assets are the resources owned and controlled by the firm or the
company.
Examples of these are cash, computer systems and patents.
2. Liabilities are the obligations of the company arising from past events
which are to be settled in the future. These represent what the
company owes to other people, organization, and financial
institutions.
Examples of these are mortgages, vehicles and loans.
3. Equity or Owner’s Equity is the owner’s claims in the business. It is
part of the total assets that the owners of the company fully own.
An example of this is capital.
4. Revenue or Income is the money that the company earns from its
regular sales of products or services. This is earned by the company
through sales of products or services.
Examples of this are sale of building materials and accounting
services by a CPA firm.
5. Expenses are the money that the company spends to produce the
goods or services it sells.
Examples of these are rent expense, supplies expense and
salaries expense.

Difference between Current vs. Non-Current Assets & Tangible vs.

Intangible Assets
 Current Assets are assets that can be collected, sold, and even used
up to one year after year-end date.
Examples of Current Assets are:
 Cash is money on hand, or in banks, and other items
considered as a medium of exchange in business
transactions.
 Accounts Receivable are amounts due from customers
arising from debts.
 Notes Receivable are amounts due from clients supported
by a written note or promise.
 Inventories are assets held for resale in the course of the
business.
 Supplies are items purchased by an enterprise that is
unused as of the reporting date.
 Prepaid Expenses are advance payment for expenses.
  Accrued Income is an income or revenue earned by the
firm but not yet collected.
 Short-term Investments are the investments made by the
company that is intended to be sold immediately.

 Non-current Assets are assets that cannot be collected, sold, and even
used up to one year after year-end date.
Examples of Non-Current Assets
 Property, Plant, and Equipment are long-lived assets that
have been acquired for use in operations.
 Long term Investments are the investments of the firm
made for long term purposes.
 Tangible Assets are physical assets in the form of cash,
furniture and fixtures, and supplies.
 Intangible Assets are non-physical assets in the form of
trademarks and patterns.

LIABILITIES
Current vs. Non-Current Liabilities
 Current Liabilities are those that reach its due date for payment
(paid, recognized as revenue) within one year after year-end date.
Examples of Current Liabilities
 Accounts Payable are amounts due or debts to the suppliers for goods
purchased or for services received on account.
 Notes Payable are amounts due to third parties supported by a written
note or promise.
 Accrued Expenses are treated as liabilities since these are the
expenses that are incurred but not yet paid (e.g. salaries payable, taxes
payable).
 Unearned Income is cash or payment collected in advance.

 Non-current Liabilities are those that do not reach its due date for
payment, (paid, recognized as revenue) within one year after year-end
date.
Examples of Non Current Liabilities
 Loans Payable is a contract wherein the owner of the property gives
the right to use it to another party in exchange for an interest payment
and gives back the property at the end of their contract. It is
documented by promissory note. And in the case there is still a portion
which is unpaid as of the date of a company's balance sheet, the
remaining balance on the loan is called a loan payable.
  Mortgage Payable is the liability of a property owner to pay a loan
that is secured by property and from the borrower’s point of view. The
mortgage is considered as long-term liability. Some part of the debt
that is payable within the next 12 months is classified as a short-term
liability. The remaining unpaid principal will be the total amount due
of the loan. Just like in assets, there is also a classification when it
comes to a liability account.

OWNER'S EQUITY
There are two (2) important elements that comprised the equity:
 Capital is the worth of cash and other assets invested in the business.
 Drawing is an account debited for assets withdrawn by the owner for
personal use from the business.
 Income - is the increase in resources resulting from the performance
of service or selling of goods.
Examples of income accounts are:
 Service revenue for service entities
 Sales for merchandising and manufacturing
companies
 Interest Income
 Expense -is the decrease in resources resulting from the operations of
the business.
Examples of expense accounts are:
 Salaries expense
 Interest expense
 Utilities expense

ADJUSTING ENTRIES
ADJUSTING ENTRY FOR DEPRECIATION
When an entity acquired long-lived assets such as buildings, service
vehicles, computers or office furniture, it is basically buying or prepaying for
the usefulness of that asset.
Therefore, a portion of the cost of the asset should be recorded as
expense in each accounting period.
ASSET COST is the amount an entity paid to acquire the depreciable asset.
ESTIMATED SALVAGE VALUE is the amount that the asset can be
probably sold for at the end of its estimated useful life.
ESTIMATED USEFUL LIFE is the number of periods that an entity can
make use of the asset.

STRAIGHT-LINE METHOD COMPUTATION FOR DEPRECIATION

DEPRECIATION EXPENSE FOR EACH TIME PERIOD= (ASSET COST
LESS ESTIMATED SALVAGE VALUE DIVIDED BY ESTIMATED USEFUL
LIFE)
JOURNAL ENTRY

Date Accounts Title and Explanations Debit Credit

Xxx Depreciation Expense P
Accumulated Depreciation P
To record depreciation

Depreciation Expense is the account title used to record the amount of

devaluation of a property in an accounting period.
Accumulated Depreciation is a contra-asset account used in recording
the amount of depreciation of an asset.
If you will not record the adjustments for depreciation the value of the
particular asset will be overstated (the amount is higher than its correct value),
and expenses will be understated (the amount is lower than its correct value)
EXAMPLE:
Case 1: Paid P160,000 cash to purchase a delivery van (surplus) on Jan. 1.
The van was expected to have a 3 year life and a P10,000 salvage value.
Depreciation is computed on a straight-line basis. Prepare the adjusting entry
for the year ended December 31, 2016.
Transaction: To record the depreciation of delivery van..
Analysis: Assets decreased (decrease in the book value of the asset.
Owner's equity decreased (depreciation expense).
 Rules: Decreases in assets are recorded by credits. Decreases in
owner's equity are recorded by debits.
Entries: Owner's equity is decreased by debits to depreciation
expense-service vehicle. Assets are decreased by credits to contra-asset
account accumulated depreciation- service vehicle.

Date Accounts Title and Explanations Debit Credit

2020
Dec.31 Depreciation Expense – Service Vehicle P50,000
Accumulated Depreciation – Service P50,000
Vehicle
To record depreciation of service
vehicle
Using the straight-line method in computing for the depreciation of
the service vehicle for the period is Php 50,000.00.
Asset Cost Php 160,000.00
Less: Estimated Salvage Value 10,000.00
Depreciable Cost 150,000.00
Divided by: Estimated Useful Life 3 years
Depreciation Expense for the Year Php 50,000.00
Case No. 2: The owner of RDS Company paid Php 160,000.00 cash to
purchase a delivery van (surplus) on January 1. The van was expected to have
a three-year life and a Php 10,000.00 salvage value. Depreciation is computed
on a straight-line basis. Prepare the adjusting entry for the month ended
January 31, 2019.
It has the same analysis but take note that the required adjusting entry
for depreciation is for the period of one month. If this is the situation, divide
the depreciation expense for the year.

Depreciation Expense for the Year Php 50,000.00

 Divided by 12 months
Depreciation Expense for the Month Php 4,166.67

Date Accounts Title and Explanations Debit Credit

2019
Jan.31 Depreciation Expense – Service Vehicle P4,166.67
Accumulated Depreciation – Service P4,166.67
Vehicle
To record depreciation of service
vehicle

ADJUSTING ENTRY FOR BAD DEBTS EXPENSE OR DOUBTFUL

ACCOUNTS EXPENSE
Businesses may allow some of their customers to purchase goods and
acquire services on credit. As some business owners' experiences, some of
their customers did not pay their obligations. Therefore, to recognize those
accounts which are doubtful, accountants recognized it as expense.
Accountants estimates the percentage of receivables which may be considered
doubtful.
Using the percentage of the revenue in provisioning the allowance for
doubtful accounts.
JOURNAL ENTRY

Date Accounts Title and Explanations Debit Credit

Xxx Doubtful Accounts Expense P
Allowance for Doubtful Accounts P
To record provision for doubtful accounts

Doubtful Accounts Expense or Bad Debts Expense refers to the

amount of accounts receivable that is estimated as uncollectible and as
recognized as expense in the current accounting period.
Allowance for Doubtful Accounts or Allowance for Bad Debts is a
contra- asset account used to record the amount of doubtful accounts
considered as a deduction to the total accounts receivable.
 If you will not record the adjustments for doubtful accounts assets will
be overstated (the amount is higher than its correct value) and expenses will be
understated (the amount of expenses is lower than its correct value).
EXAMPLE:
Case No. 3: Based on the experience of Orani Service Company, 2% of the
outstanding Accounts Receivable amounting to Php 2,000,000.00 is
considered doubtful. Record the adjusting entry for uncollectible accounts for
the year ended December 31, 2019.
Transaction: To record the allowance for uncollectible accounts
Analysis: Assets decreased (decrease in the book value of the asset,
Accounts Receivable). Owner’s equity decreased (Uncollectible
Accounts Expense).
Rules: Decrease in assets are recorded by credits. Decrease in owner’s
equity are recorded by debits.
Entries: Owner’s equity is decreased by debits to Doubtful Accounts
Expense.
Assets are decreased by credits to contra-asset account Allowance for
Doubtful Accounts (Bad Debts and Uncollectible Accounts are terms
synonymous to Doubtful Accounts).

Date Accounts Title and Explanations Debit Credit

2019
Dec.31 Doubtful Accounts Expense P40,000
Allowance for Doubtful Accounts P40,000
To record allowance for doubtful
accounts
Outstanding Accounts Receivable Php 2,000,000.00
Multiplied by percentage of allowance 2%
Amount of Doubtful Accounts Php 40,000.00
ADJUSTING ENTRY FOR ACCRUALS
 Under accrual accounting, the accountant recognized income and
expenses as they are earned and incurred. The adjustments is based on this
principle.
ACCRUED REVENUE or Accrued Income arises when the
business renders services or delivers goods to its clients, but collections have
not yet been received.
JOURNAL ENTRY

Date Accounts Title and Explanations Debit Credit

Xxx Receivable Accounts P
Revenue Accounts P
To record advance receipt of revenue
Accountants used to debit receivable account because the payment for
the services rendered is yet to received while revenue account is credited as a
recognition for the income earned though still not paid by the customer.
ACCRUED EXPENSES arise when businesses incur expenses but
not yet paid. Examples are salaries, taxes and interest.
JOURNAL ENTRY

Date Accounts Title and Explanations Debit Credit

Xxx Expense Account P
Payable Accounts P
To record depreciation

Accountants debit an expense account in recognition to the expense

that has been incurred but not yet paid while credit payable account because
that particular expense is yet to be paid.
EXAMPLE:ACCRUED REVENUES
Case No. 5: RDS Laundry Services rendered a rush laundry services to a
client on June 30, 2019 amounting to Php 35,000.00. The services have been
earned but unbilled.
Transaction: To record accrual of unrecorded revenues
Analysis: Increase in assets. Increase in owner’s equity.
 Rules: Increase in assets are recorded by debits. Increase in owner’s
equity are recorded by credits.
Entries: Increase in assets is recorded by a debit to Accounts
Receivable. Increase in owner’s equity is recorded by a credit to
Laundry Revenues.

Date Accounts Title and Explanations Debit Credit

2019
June3 Accounts Receivable P35,000
0
Laundry Revenue P35,000
To record accrual of unrecorded
revenues

Case No. 6: The owner of RDS Company invested Php 100,000.00 cash in
certificate of deposit that paid 5% annual interest. The certificate was acquired
on January 1 and carried a one-year term to maturity. The adjusting entry for
the year ended December 31, 2020 is shown below:

Date Accounts Title and Explanations Debit Credit

2020
Dec.31 Interest Receivable P5,000
Interest Revenue P5,000
To record accrual of unrecorded
revenues
The interest earned for the year is determined by the following formula:
Interest = Principal x Interest Rate x Time Period
=P100,000.00 x 5% x 12/12 (12/12 = 1 year)
=P100,000.00 x 0.05 x 1
= P5,000.00
Case No. 7: The owner of RDS Company invested Php 100,000.00 cash in
certificate of deposit that paid 5% annual interest. The certificate was acquired
on May 1 and carried a one-year term to maturity. The adjusting entry for the
year ended December 31, 2020 is shown below:
 Date Accounts Title and Explanations Debit Credit
2020
Dec.31 Interest Receivable P3,333.33
Interest Revenue P3,333.33
To record accrual of unrecorded
revenues
The interest earned for the year is determined by the following formula:
Interest = Principal x Interest Rate x Time Period
=P100,000 x 5% x 8/12 (8/12 =certificate was acquired on May 1)
=P100,000 x .05 x 8/12
= P3,333.33
EXAMPLE:ACCRUED EXPENSE
Case No. 8: The owner of RDS Company borrowed Php 500,000.00 by
issuing a one year note with 10% annual interest to Rural Bank of Malasakit
on October 1, 2020. Prepare the adjusting entry for the year ended December
31, 2020.
Transaction: To record the accrual of unrecorded expense
Analysis: Increase in liability; Decrease in owner’s equity.
Rules: Increase in liabilities is recorded by credits. Decrease in
owner’s equity is recorded by debits.
Entries: Decrease in owner’s equity is recorded by debiting Interest
Expense. Increase in liability is recorded by crediting Interest Payable.

Date Accounts Title and Explanations Debit Credit

2020
Dec.31 Interest Expense P12,500
Interest Payable P12,500
To record accrual of unrecorded
expense
The interest incurred for the year is determined by the following formula:
Interest = Principal x Interest Rate x Time Period
=Php 500,000.00 x 10% x 3/12 (3/12 = from October to December)
=Php 500,000.00 x .05 x 3/12
=Php 12,500.00
Case No. 9: Three-day salaries are unpaid as of December 31 2020. Salaries
are Php 75,000.00 for a five-day work week.

Date Accounts Title and Explanations Debit Credit

2020
Dec.31 Salaries Expense P45,000
Salaries Payable P45,000
To record accrual of unrecorded
expense
The amount of Php 75,000.00 was divided into five days to arrive at
the salaries to be paid per day and multiplied by three days to compute for the
three-day accrued salaries.
ADJUSTMENTS FOR DEFFERALS
Deferral is the postponement of the recognition of "an expense
already paid but not yet incurred" or of "revenue already collected but not yet
earned.
Deferred revenue of Unearned Revenue refers to revenue already
received but not yet earned.
Income Method is used by accountant, if the account used in the
initial entry in recording revenue is an income account.
If the accountant used INCOME METHOD the adjusting entry will
be this way:

Date Accounts Title and Explanations Debit Credit

Xxx Revenue Account P
Liability Account P
To record adjustments for defferals
The initial journal entry for INCOME METHOD is:

Date Accounts Title and Explanations Debit Credit

Xxx Cash P
Revenue Account P
To record adjustments for deferrals

The accountant recognized the all cash payment as revenue even if

there are still some portion of it has not yet been rendered that's why the
adjustment will be a deduction from the revenue account and establishing a
liability.If the accountant will not adjust the accounts, revenue account will be
overstated, and liability account will be understated.
Liability Method is used by accountant if the account used in the
initial entry in
recording revenue is a liability account.
If the accountant used LIABILITY METHOD the adjusting entry will
be this way:

Date Accounts Title and Explanations Debit Credit

Xxx Liability Account P
Revenue Account P
To record adjustments for deferrals

The initial journal entry for LIABILITY METHOD is:

Date Accounts Title and Explanations Debit Credit

Xxx Cash P
Liability Account P
To record adjustments for deferrals

The accountant records all cash payments as liability though there are
some portions of that payment has been rendered and must be recognized as
income.
If the accountant will not record an adjusting entry the liability
account will be overstated, and revenue account will be understated.
EXAMPLE:
Case No. 10: On July 1, 2019, Matapat Company received a check amounting
to Php 48,000.00 for two-year rent paid in advance. The accountant may
record a credit unearned rent revenue (liability) or rent revenue (income)
depending on the accounting policy of the company.
1. Liability Method

Date Accounts Title and Explanations Debit Credit

2019
July Cash P48,000
1
Unearned Rent Revenue P48,000
To record the payment for 2-year rental
2. Income Method

Date Accounts Title and Explanations Debit Credit

2019
July Cash P48,000
1
Rent Revenue P48,000
To record adjustments for deferrals
At the end of the year, an adjusting entry has to be made to establish
the correct balances of the unearned rent revenue and rent revenue accounts.
The amount of Php 48,000.00 represents the 2-year rental deposited. To
compute for the monthly rental, divide the total amount by 24 and the result is
Php 2,000.00.
The necessary adjusting entries are as follows depending on the
method used in recording.
1. .Liability Method

Date Accounts Title and Explanations Debit Credit

2019
July Unearned Rent Revenue P12,000
1
Rent Revenue P12,000
To record adjusting entry for rent
 As of December 31, 2019, there is already six months of rent which
has been earned. That is the reason why the accountant needs to establish the
revenue account amounting to Php 12,000.00 and deduct the same amount to
the previously established liability account.
2. Income Method

Date Accounts Title and Explanations Debit Credit

2019
July Rent Revenue P36,000
1
Unearned Rent Revenue P36,000
To record adjusting entry for rent
Eighteen (18) months of the total rent payment has not been earned as
of December 31, 2019 . That is the reason why the accountant needs to deduct
Php 36,000.00 (Php 2,000.00 a month X 18 months) from the previously
recorded revenue in order to arrive at the correct amount of revenue earned for
the period. Unearned Rent Revenue is established at the end of the period to
reflect the amount of liability the company still has to earn.

ADJUSTMENTS FOR PREPAID EXPENSES

Prepaid Expense is an expense already paid for in advance but not
yet incurred.
Asset Method is used by accountant if the account used in the initial
entry in recording revenue is an asset account.
If the accountant used ASSET METHOD the adjustments will be this
way:

Date Accounts Title and Explanations Debit Credit

Xxx Expense Account P
Asset Account P
To record adjustments for prepayments

The initial journal entry is:

Date Accounts Title and Explanations Debit Credit

 Xxx Assets Account P
Cash P
To record supplies bought

The accountant recorded all the purchases of a prepaid asset as an

asset. The adjustment is to reduce the amount of recorded asset because there
are some portions of that asset has been used up already and by debiting an
expense account the adjustment recognizes the portion that has been used up.
Expense Method is used by the accountant if the account used in the
initial entry in recording revenue is an expense account.
If the accountant used EXPENSE METHOD the adjustment will be
this way:

Date Accounts Title and Explanations Debit Credit

Xxx Assets Account P
Expense Account P
To record adjustments for prepayments

The initial journal entry is:

Date Accounts Title and Explanations Debit Credit

Xxx Expense Account P
Cash P
To record supplies bought

The accountant recorded purchase of a prepaid expense as an expense

therefore the accountant must credit the expense account being debited
because there are still portion that is stil not used and by debiting an asset
account, the accountant established the portion that is not yet expired or used.

EXAMPLE:
Case No. 11: On October 1, 2019, Malinis Company acquired a three-year
insurance policy for Php 36,000.00 paid in advance. The accountant may
record a debit of Prepaid Insurance (asset) or Insurance Expense (expense)
depending on the accounting policy of the company.
The initial journal entry could be between the two:
1. Asset Method
Date Accounts Title and Explanations Debit Credit
2019
Oct. Prepaid Insurance P36,000
1
Cash P36,000
To record the acquisition of 3-year
insurance

2. Expense Method
Date Accounts Title and Explanations Debit Credit
2019
Oct. Insurance Expense P36,000
1
Cash P36,000
To record the acquisition of 3-year
insurance

At the end of the year, an adjusting entry has to be made to establish

the correct balances of the prepaid insurance and insurance expense accounts.
The amount of Php 36,000.00 represents the three-year insurance coverage. To
compute for the monthly insurance, divide the total amount by 36 and the
result is Php 1,000.00.

The necessary adjusting entries are as follows depending on the method used
in recording.
1. Asset Method
Date Accounts Title and Explanations Debit Credit
2019
Dec.31 Insurance Expense P3,000
Prepaid Insurance P3,000
To record adjustments in insurance
 As of December 31, 2019, three months of the three-year insurance
coverage has been incurred. The accountant deducted Php 3,000.00 by
crediting Prepaid Insurance and established an Insurance Expense account
which represents the portion of the insurance which has been incurred.

2. Expense Method
Date Accounts Title and Explanations Debit Credit
2019
Dec.31 Prepaid Insurance P33,000
Insurance Expense P33,000
To record adjustments in insurance
As of December 31, 2019, there is still 33 months of the three-year
insurance coverage still not incurred. The accountant debited Prepaid
Insurance amounting to Php 33,000.00 to recognize the unexpired portion of
the asset and credited Insurance Expense to deduct the unexpired portion of
the asset.

PREPARING THE ADJUSTED TRIAL BALANCE

After all the adjusting entries and postings have been journalized and
posted, the accountant may now prepare the adjusted trial balance. The main
difference of adjusted trial balance to the unadjusted trial balance is the
amounts are already adjusted to its correct figures. The accounts which are not
previously included in the trial balance are now listed in the adjusted trial
balance.

PREPARING THE FINANCIAL STATEMENTS

A complete set of financial statements being prepared periodically by
a typical business is composed of the following:
1. Statement of Comprehensive Income – is also called as Income
Statement and Statement of Financial Performance. It is the financial
statement that shows the performance of the business operations for a
specific period. It shows if the company earns a profit or incur a loss.
2. Statement of Changes in Equity – is also used to be called as the
Capital Statement. It shows the movement of equity accounts in each
period.
 3. Statement of Financial Position – is also used to be called as
Balance Sheet. It shows the balances of the assets, liabilities and
equity accounts in a period.
4. Statement of Cash Flows – provides about the cash receipts and cash
disbursements during a period.
5. Notes- comprises a summary of significant accounting policies and
other explanatory information.
JOURNALIZING AND POSTING CLOSING ENTRIES
In preparation to the next accounting period, nominal accounts and
drawing account are closed or bought to zero balances by transferring
them to an Income Summary Account, a temporary account. The reason
behind this is that these nominal and drawing account just relate with a
particular accounting period. The Income Summary account is
subsequently closed to owner’s capital account.
Real accounts relate to one or more accounting period and for this
reason, their ending balances are not closed to zero but instead carried
forward as beginning balances in the next accounting period.

PREPARING POST-CLOSING TRIAL BALANCE

The trial balance being prepared after all the nominal accounts and
drawing account has been closed is called the post-closing trial balance. It
shows all the real or permanent accounts with their balances. These balances
will be carried over the next accounting period.

JOURNALIZING AND POSTING REVERSING ENTRIES

Though this step is optional, many accountants prefer to reverse
certain adjusting entries for ease and convenience. Reversing entries are
literally the exact opposite of adjusting entries except that reversing entries are
not applicable to adjusting entries made for deferrals initially recorded using
real accounts.
The adjusting entries that may only be reversed are (1) accrued
expenses, (2) accrued revenues, (3) deferred revenues under the income
method and (4) prepayments under the expense method.
PREPARATION OF FINANCIAL STATEMENTS