CHAPTER 7: POSTING TO LEDGER Errors revealed by trial balance

- can reveal errors that caused total

debits and total credits to be unequal.
Posting  Transplacement error (slide error) -
- third step in accounting cycle; process committed when number of digits in
of transferring data from the journal to an amount is incorrectly increased
the appropriate accounts in the ledger. or decreased (ex.: 1,000 was
 Purpose - to classify effects of recorded as 10,000)
transactions on specific A, L, E, I,  Transposition error - when digits in
and EX in order to provide more an amount are interchanged (ex.:
meaningful information 12,345 is recorded as 13,245)

Step 2: Journal entry Errors NOT revealed by trial balance

Mar. 1, Salaries exp. 30k - cannot reveal errors that does not
20x21 Cash 30k cause the total dr and cr to be unequal
To record salaries (ex.: using wrong accounts with the
expense same normal balance as the correct
one).
Step 3: Posting
Jisoo Laundry Shop
Cash Unadjusted Trial Balance
Dr. Cr. January 3, 20x1
30k Mar.
1 Accounts Debit Credit
Cash ₱192,500
Salaries expense Acc. Rec. 10,000
. Dr. Cr. Pre. Supplies 20,000
Mar. 1 30k Equip. - 200,000
Washing
Jisoo, Capital 100,000
Preparing the Unadjusted Trial Service fees ₱500,000
Balance Salaries exp. 25,000
Totals ₱525,000 ₱525,000
Trial Balance - list of general ledger
accounts and their balances. Prepared
to check the equality of total debits and Normal Balances
total credits.
ASSET, EXPENSE = DEBIT
Types of Trial Balance LIABILITY, EQUITY, INCOME =
CREDIT
a. Unadjusted trial balance -
prepared before adjusting entries Order of Account titles in trial
are made. Adjusting entries cannot balance
be prepared if debits and credits in
unadjusted are not equal. ALEIE
b. Adjusted trial balance - prepared
after adjusting entries but before 1. Asset
FSs are prepared. 2. Liabilty
c. Post-closing trial balance - 3. Equity
prepared after the closing process. 4. Income
5. Expense
 CHAPTER 8: ADJUSTING ENTRIES Case #2: Accrual of income - Rent
income
Adjusting entries
- entries made to prior to the preparation KJS Co. Rents out its building monthly
of FS to update certain accounts for ₱50,000. As of Dec. 31, 20x1, the
tenant has not yet paid for the month of
Purpose of adjusting entries December
1. Take up unrecorded income and
expenses of the period AJE:
2. Split mixed accounts into real and
nominal accounts Dec. Rent receivable 50k
31, Rent income 50k
Accrual of Income and Expenses 20x1 To accrue rent income

Accrual / accrue - recognize an income Case #3: Accrual of expense -

that is already earned but not yet Interest expense
collected; expense that is already
incurred but not yet paid. KJS Co issued a 12% ₱100,000 one-
year notes payable on Oct. 1, 2021.
Case #1: Accrual of Income and Due on Oct. 1, 2022.
Expenses
Use interest income (expense)
KJS Co. Received a 12%, ₱100,000, accrued formula (Case #1)
one-year note receivable on Apr. 1,
20x1. Note is due on Apr. 1, 20x2. Interest expense = 3,000

Interest income accrued formula: AJE:

I = P x r x t (divided by 12 months) Dec. 31, Interest expense 3k

2021 Interest payable 3k
I = interest = 12% To accrue interest expense
P = principal = 100,000
T = time period = 9 months (Apr. - Case #4: Accrual of expense -
Dec.) / 12 months Utilities expense

Interest = 9,000 The cost electricity used for the month

of Dec 2021 is ₱4,000. The bill was
Adjusting journal entry: received and paid Jan. 2022.

Dec. Interest receivable 9k AJE:

31, Interest income Dec. 31, Utilities expense 4k
20x1 To record interest received 9k 2021 Utilities payable 4k
over the period
To accrue unpaid utilities
Case #5: Accrual of expense -
Salaries expense The Concept of Immediate
Recognition
Employees earned total of ₱100,000 in
Dec 2021. However, salaries were paid - cost that does not have future
in Jan 2022. economic benefits are immediately
recognized as an expense.
AJE:
Expense recognition principles
Dec. Salaries expense 100k
31, Salaries 100k 1. Matching - costs that are directly
2021 payable associated with the earning of revenue
To accrue interest expense are recognized as expenses in the
same period.
Recognition of Depreciation expense - Application - cost inventory is initially
recognized as asset and charged as
The Concept of Systematic and expense (ex: COGS) when inventory is
rational allocation - costs that provide sold.
economic benefits over several
accounting periods but cannot be 2. Systematic & rational allocation -
directly associated with earning revenue costs that are not directly associated
are recognized as expense with the earning are recognized as
expense over the periods the benefits
Case #1: Depreciation expense are consumed
- Application - Cost of equipment is
On Jan 1, 2021, KJS Co acquired initially recognized as asset and
equipment for ₱20,000. Equipment is charged as expense (ex.: Depreciation)
expected to be used for 4 years. over the periods the equipment is used.

Accumulated depreciation expense 3. Immediate recognition - costs that

formula: do not provide future economic benefits
are immediately recognized as
Cost (20,000) ÷ Useful life (4 years) = expenses.
5,000 Annual depreciation expense - Application - account receivable that
becomes doubtful of collection is
AJE: immediately recognized as expense.
Dec. Depreciation expense 5k
31, Accumulated 5k Real, Nominal, and Mixed Accounts
2021 depreciation
To record the dep expense over the
period 1. Real accounts (permanent
accounts) - not closed at the end of the
Recognition of Bad Expense accounting period. Included in balance
sheet accounts, except drawings.
Case #1: Adjusting entries - Bad
debts expense 2. Nominal accounts (temporary
accounts) - closed at the end of the
KJS Co has total accounts receivable of accounting period. Included in income
₱2,000 on Dec 31, 2021. Estimated of statement accounts including drawing,
₱500 is doubtful accounts clearing, and suspense accounts.
 Clearing accounts - used to
Dec. Bad debts expense 500 temporarily store amounts that will
31, be eventually be transferred to
Allowance for bad 500
debts another account
2021
To record the bad debts for the period  Suspense accounts - used to
temporarily store discrepancies in
 the accounts pending their analysis 2. Expense method - prepayments are
and permanent classification. initially debited to expense accounts.
Unused portion is recognized as asset,
3. Mixed accounts - both real and while the incurred remains expense.
nominal. Subject to adjustments.
Illustration: Asset VS Expense
Methods of Initial Recording of KJS Co prepays one-year insurance for
Income and Expenses ₱120,000 on Oct. 1, 2021.

 Income a. Incurred portion - the used portion

(Oct - Dec = 3 months)
1. Liability method - advanced
collection of income are initially credited (120,000 x 3 months) ÷ 12 months =
to a liability method. Earned portion is 30,000
income, unearned portion is liability.
2. Income method - collection of b. Not yet incurred portion - remaining
income is are initially recorded to an months (Jan - Oct 2022 = 9 months)
income account. Unearned portion is
recorded as liability, while earned 120,000 - 30,000 = 90,000 or (120,000
portion remains as income. x 9 months) ÷ 12 months

Illustration: Liability vs Income AJE:

ASSET METHOD
KJS Co rents it building. On Apr. 1,2021, Dec. 90k
Insurance expense
business receives one-year rent in 31, Prepaid insurance 90k
advance of ₱120,000 from one of its 2021 To recognize expired portion
tenants. Rent per month is ₱10,000.
EXPENSE METHOD
a. Earned portion - recognized as Dec. Prepaid insurance 30k
income = 9 months (Apr - Dec) x 31, Insurance expense 30k
10,000 monthly rent = 90,000 2021 To recognize used portion
b. Unearned portion - recognized as
liability = 120,000 (rent paid
advance) - 90,000 (used portion) =
30,000

AJE:
LIABILITY METHOD
Dec. Unearned rent 90k
31, Rent income 90k
2021 To recognize used portion of the rent

INCOME METHOD
Dec. Rent income 30k
31, Unearned rent 30k
2021 To recognize unearned portion of the
rent

 Expense

1. Asset method - prepayments of

expenses are initially debited to asset
accounts. The incurred (used-up)
portion is expense, while the unused
remains as asset.