BACC 5

NOTES: BASIC ACCOUNTING

ACCOUNTING CYCLE

1. Evidence gathering to 2. Journalize in either: 3. Recording in the

support transaction a. Journal Voucher books of accounts:
b. Cash Receipt A. Book of original entry
Voucher a. General Journal
c. Cash Payment b. Cash Receipt
Voucher Journal
c. Cash Payment
Journal
d. Other Special
Books
Control: the transaction must Control: Control:
be business-related and Prepared by – to establish a. The recording must
authorized by any officer of responsibility be systematic and
the company Check by – to check and to Chronological
establish accuracy b. It must be done by a
Approved by- to authorize person not handling
entry to book of cash
accounts c. The books must be
registered with BIR
d. The books must have
monthly totals
Accounting Principles to be
observed:
a. Entity
b. Objectivity
c. Cost
d. Materiality
e. Matching
f. Accounting Period
g. Revenue Recognition
h. Conservatism

4. From the journal This is the first phase of

entry (book of summarization. We will
original entry), the transfer the figures in the
monthly totals will be general ledger to the working
transferred monthly paper’s first two columns.
to the ledger, which is This is your trial balance.
the book of final
entry. We call this
posting.

5. Preparation of 6. Preparation of 7. Preparation of

Adjusting Entries adjusted trial balance Financial Statements
a. Accrual of income a. Income Statement
 and expenses b. Statement of
b. Prepayments Financial
c. Deferred Condition
d. Depreciation c. Statement of Cash
e. Impairment of Flows
receivables
f. Correction

8. Preparation of Preparation of post-closing 9. Preparation of

Closing Entries trial balance Reversing Entries

THE ADJUSTMENTS:

Adjusting entries- entries to update or correct an account.

ROUTINE ACCOUNTING ADJUSTMENTS

1. Accrued Expenses. These are expenses already incurred but not yet paid by the company.
Example 1: A company applying a cut-off period for its payroll can have its salaries and
wages unrecorded at the end of the year. The employees have already rendered their
services to the company but the company has not paid them yet because the employees
will then be paid in accordance with the cut-off procedures.
To record: Accrued Salaries- P25,000
Adjusting entry will be:
Salaries & Wages P25, 000.00
Accrued Salaries Payable P25, 000.00
-to take up accrued salaries and wages

Example 2: A company received its electricity bill for the period amounting to P5, 000.
When they received the bill, they had already consumed the electric power, but not yet
paid on or before the due date, which might not be another accounting period. The entry
to update the account will be:
To record: Accrued Electricity bill – P5,000
Adjusting entry will be:
Utilities Expense P5, 000
Accrued Utilities Payable P 5,000

2. Accrued Income. This is the income that is already earned by the company but not yet
received. An ideal example of accrued income is the interest earned by the company from
its time deposit account. For example, the company placed its P100,000 cash into a 30-
day, 12% time deposit with bank X on December 21. From December 21 to 31, the
company already earned an interest, which the company should recognize, but it cannot
received yet, because the interest can only be received upon the maturity of the time
deposit.
Example: A company placed its P100,000 into a 30-day, 12% time deposit with Bank X on
December 18, 2022.
The adjusting entry to update such accounts should be:
 Accrued Interest Receivable P 433.33
Interest Income P 433.33
To take up accrued interest from time deposit made with Bank X
Computation: 100,000 x 12% x 13 days/360 days
Dec 18-31 = 13 days
360 days is constant ( the number of days used in the industry)

3. Prepaid Expenses. These are expenses already paid by the company, although not yet
incurred or advanced payments. To recognize the adjusting entry depends on the method
used by the company- asset method and expense method.
Example: A company paid 6-month advanced rental, amounting to P120,000 on August 1,
2022. How do we make adjusting easy for this type of adjusting account?

Computation: 120,000/6 months= P20,000/ month

August to December, 2022= 5 months
P20,000 x 5 months = P100,000
P120,000-100,000 = P20,000
Note: the P100,000 represents the amount already used by the business as of the
demarcation line, which is the accounting period. This is the expense portion of the
advance payment at the end of the accounting period.
P20,000 represents the amount not yet used by the business as of the demarcation line,
which is the accounting period of the company. This is the asset portion of the advance
payment at the end of the accounting period.

Uses of the figures as shown in the interpretation:

1. If the company is using asset method, your debit side in the adjusting entries should
recognize the expense amount. In our example using the asset method, therefore:
Rent expense P100,000
Prepaid Rent P100,000
To adjust prepaid rent account

2. If the company is using the expense method, the adjusting entry will be:
Prepaid Rent P 20,000
Rent Expense P 20,000

4. Unearned Income – this is the income already received by the company but not yet earned, or
in other words, this is the advance receipt coming from the customers. Like the prepaid expenses,
the adjusting entry depends on the method used by the company, because there are also two
methods under this account. These are the liability method and the income method.
Example: A company received a 6-month advanced rental, amounting to P120,000 on
August 1, 2022.
Computation: 120,000/6 months= P20,000/ month
August to December, 2022= 5 months
P20,000 x 5 months = P100,000
P120,000-100,000 = P20,000
 Note: the P100,000 represents the amount already earned by the business as of the
demarcation line, which is the accounting period. This is the income portion of the
advance payment at the end of the accounting period.
P20,000 represents the amount not yet earned by the business as of the demarcation line,
which is the accounting period of the company. This is the liability portion of the advance
payment at the end of the accounting period.
Uses the figures as shown in the interpretation:
1. If the company is using liability method, your credit side in the adjusting entries
should recognize the income account. In our example using the asset method,
therefore:
Unearned Rent Income P100,000
Rent Income P 100,000
To adjust unearned rent income account

2. If the company is using the income method, the adjusting entry will be:
Rent income P100,000
Unearned Rent Income P100, 000

5. Depreciation – is the systematic allocation of the cost of an asset. The straight line method is
normally used in computing the depreciation of an asset.
Formula: Cost – Salvage/scrap Value
Estimated Life
Where:
Cost- is the acquisition price of the asset purchase
Salvage value or Scrap Value is the selling price of the asset after its estimated life.
Normally, after the asset is used in the business, the business enterprise can still
sell the asset at a second hand price; and
Estimated Life – is the estimated effective use of the asset

Example : A company purchased a car amounting to P500,000 on January 1, 2022. Its salvage
Value is P200,000 at the end of 5 years. The depreciation will then be computed
as follows:

Depreciation = 500,000-200,000 = P60,000

5 years
And the entry to take up depreciation is:
Depreciation P 60,000
Accumulated depreciation P60,000
To take up the depreciation for the period

To compute the depreciation for the month, divide the result of your computation by 12.
Depreciation per month will be: 60,000/12 months = P5,000
So if the car was bought last August only of 2022. The depreciation from August to
December will be: P5,000 x 5 months = P25,000
And the entry to take up the depreciation will be:
Depreciation P 25,000
 Accumulated depreciation P25,000
6. Doubtful Account. This is the portion is the portion of the estimated collectible accounts. The
estimate can be based on a percentage of income, sales, or a percentage of accounts
receivable.
When it is based on income or sales, the business enterprise would determine how much
of the income or sales will not be collected or what the effect of the possible uncollectible
accounts is to its earnings. In order to use this method, multiply the amount of the net
credit sales with the estimated percentage of accounts that cannot be collected
Example: The total income or sales made by the company during the year is P100,000 and
an estimated 2% of its income or sales are uncollectible.
The entry will be:
Doubtful Account P2,000
Allowance for doubtful account P2,000

The entry would be different if it is based on accounts receivable, because the business
enterprise is after the balance sheet presentation. The business enterprise would want to
know how much of the receivable may not be collected. Here, the enterprise has an
emphasis on the asset presentation than the income determination. Thus if you use this
method, you still have to deduct the present balance of allowance for doubtful account
after multiplying the accounts receivable with estimated percentage of doubtful account.

Example: The balance of Accounts Receivable is P200,000 and the allowance for doubtful
accounts is P5,000. The company estimates that 10% of the accounts receivable is doubtful
of collection.
The computation of doubtful accounts will be:

Accounts Receivable P200,000

Estimate of doubtful accounts x 10%
P 20,000
Less: Balance of allowance for doubtful account 5,000
Amount of adjustment 15,000
And so the entry will be:
Doubtful Account P15, 000
Allowance for doubtful accounts P15, 000
To take up doubtful accounts

7. Correction of Errors
The following are correcting entries, which will be treated as adjusting entries:
Example: an accountant has journalized the payment of rent for the month, amounting to P20,000
as follows:
Advertising Expense P20,000
Cash P20,000
Advertising expense was debited, instead of rent expense. Here the advertising expense was
overstated, while rent expense was understated.
To correct the entry:
Rent Expense P 20,000
 Advertising Expense P20,000

Correcting entry is different from adjusting entry, in that, it happens only when an accountant
has committed an error in the recording process or in processing financial figures.