Books of Accounts and Trial Balance

THE ACCOUNTING CYCLE

1-3 RECORNING PHASE

1. Gather the business documents

2. Analyze and Journalize in the General Journal

3. Post to the General Ledger

4. Prepare the Unadjusted Trial Balance

5. Journalize and Post Adjusting Entries

6. Prepare the Adjusted Trial Balance

7. Prepare the Financial Statements

8. Journalize and Post the Closing Entries

9. Prepare the Post-closing Trial Balance

10. Journalize and Post the Reversing Entries

The Chart of Accounts

• A listing of Account titles with its respective account numbers which guides a bookkeeper in the
recording the company’s transactions

• Accounts are arranged with the assets listed first, followed by liabilities, equity, income and
expenses last
DJ Company
Chart of Accounts

Assets Equity
101 Cash 301 DJ, Capital
102 Accounts Receivable 302 DJ, Drawing
103 Supplies on hand 303 Income Summary
104 Merchandise Inventory Income
151 Equipment 401 Professional Fees Income
152 Accumulated Depreciation - Equipment Expenses
Liabilities 501 Supplies Expense
201 Accounts Payable 502 Repairs Expense
202 Notes Payable 503 Depreciation Expense
203 Interest Payable 504 Rent Expense
204 Salaries & Wages Payable 505 Insurance Expense
205 Unearned Revenue 506 Salaries & Wages Expense
210 Loans Payable 507 Interest Expense

The Journal

• Is one of the books of accounts

• Known as the books of original entry

• Known as the books of original entry

• General Journal – the most basic form of a journal

Functions of the Journal

 To disclose the complete effects of a transactions

 To provide a chronological record of the transactions
 Assists in the prevention or location of errors

2 kinds of journal entry

Simple Journal Entry- involves only two accounts – one debit one credit

Compound Journal Entry – involves more than 2 accounts

The LEDGER

 The second book of accounts

 The book of final entry

THE TRIAL BALANCE

• Summary of all open accounts

• Ensures that all debits are equal to all the credits after journalizing ang posting

HOW TO LOCATE ERRORS – TB

1. A difference of 10 would indicate an error in addition.

2. If the difference is divisible by 2, then the error probably is posting to the wrong side

3. If the difference is divisible by 9 or a multiple of 9, error must be transposition or

transplacement

THE ACCOUNT

• An individual accounting record of all the increases and decreases of a specific item of one of
the accounting elements

THE T ACCOUNT

• Is a tool used to summarize all the movements that occurred on a certain element

• The left side - Debit

• The right side – Credit

• Normal Balance – indicates how an account will react to a debit or a credit

• Contra-accounts – accounts with a reverse effect on their counter part accounts

THE TRIAL BALANCE

DJ Company
Trial Balance
December 31, 20xx

Account No. Account Name Debit Credit

101 Cash xxx
102 Accounts Receivable xxx
103 Supplies xxx
151 Equipment xxx
152 Accumulated Depreciation - Equipment xxx
201 Accounts Payable xxx
301 Paul, Capital xxx
401 Professional Fee xxx
502 Utilities Expense xxx
504 Rent Expense xxx
505 Insurance Expense xxx
xxx xxx

The Worksheet

• is a spreadsheet prepared by the entity at the end of the accounting period as a preliminary
draft in the preparation of financial statement, which usually include list of account titles,
unadjusted trial balance, adjustments of the account balances, adjusted trial balance and
financial statements.

Two Elements of Worksheet

1. The Heading

a. The name of the business

b. The title “WORKSHEET”

 c. The time period for which the worksheet is prepared.

2. The body

a. Accounts – the list of account titles

b. Unadjusted trial balance

c. Adjustments

d. Adjusted Trial Balance

e. Balance Sheet

f. Income Statement

Importance of a Worksheet

1. Helps to simplify the preparation of financial statements.

2. Helps to avoid and detect errors in the preparation of financial statements.

Illustration

A trial balance and additional information for adjustments appear below for Carla Auto Repair Shop
after one year of operation:

Additional Information:

1. 10% of the account receivable should be recognized as doubtful of collection.

2. Insurance premium recorded as prepaid was for six months starting September 1, 2017.

3. Supplies still on hand, Php. 200.

4. The note receivable represent a 60-day 12% note received from the customer on November
16,2017.

5. Machinery & equipment were acquired April 1, 2017 with an estimated useful life of 10 years
and scrap value of Php. 50,000.

6. The furniture & fixtures were acquired January 1, 2017 with an estimated useful life of 10 years
and a scrap value of Php. 2,500.

7. The notes payable is for 60 days at 18% due to Republic Finance dated December 1, 2017.

8. December gross receipts is Php. 50,000 is subject to percentage tax.

Adjusting Entries

 are entries made at the end of the accounting period to bring the balance of the accounts
(assets, liabilities, expense and revenue) up to date and make sure it comply with the matching
principle

 the purpose is to match income and expenses to the appropriate accounting period.

Matching Principle

 directs a company to report costs and expenses on it statement of financial performance

(Income Statement) in the period in which the related revenues are earned

 revenues and related expenses be recognized simultaneously in the same accounting period

Expense Recognition Principles

Cause and Effect Principle – cost that is directly related to revenue is recognized as expense when the
revenue is recognized in the same accounting period

Systematic and Rational Allocation – cost that are not directly linked to the revenue are recognized as
expense by allocating the cost over the periods benefited.

Immediate Recognition - cost incurred by the company cannot be linked to any production revenue nor
provide future economic benefits or it ceases to qualify for the recognition in the statement of financial
position as an asset

Types of Adjusting Entries

Three (3) types of Adjusting Entries:

1. Accruals

2. Prepayments

3. Non-cash Expenses

Accruals

 consist of adjusting entries relating to activities that the business have not previously recorded
in the accounts

 the entry increases both the statement of financial position (asset and liability) and statement
of comprehensive income accounts (revenue and expenses)

Accrued Revenue

 company’s asset that exist at the end of the accounting period that the company has not yet
recorded as of the statement of financial position date (Balance Sheet date)
  the adjustment will increase both receivable account (for the unrecorded asset) and revenue
account (for the unrecorded actual earnings) during a given period

 service already rendered but not yet collected, accrued interest on notes receivable.

Adjusting Entry:

Receivable xxx

Income xxx

Effect:

 If this entry is not made, the assets and the revenue accounts will be understated at the end of
the accounting period which in turn will understate the capital and net income. Therefore, the
Statement of Financial Position and the Statement of Financial Performance

Illustration 1: On October 1, 2020, the Louie Company received a twelve (12)-month promissory note
amounting to Php. 20,000 from a client at 12% interest per annum. The principal and interest are
collected upon maturity of the note. Assuming the company uses the calendar year method, the
adjusting entry would be:
Dec. 31, 2020 Interest Receivable 600.00
Interest Income 600.00
(20,000x12%x3/12)

Note: Interest is computed as

Interest = Principal x Rate x Time

Illustration 2: On August 1, 2020, Paul Company rent out its building to ABC Corp. for monthly rent of
Php. 30,000. As of December 31, 2020, ABC Corp has not paid the rent for the month of November and
December 2020.
Dec. 31, 2020 Rent Receivable 60,000.00
Rent Income 60,000.00
(30,000 x 2 months)

Note: Rent Income is recognized in 2020 regardless whether the company received the payment or not
from ABC Corp

Prepayments (Deferrals)

 this include postponement of the recognition of revenues received but not yet earned and
expenses paid but not yet incurred.

 represents accounts that were already recorded as an asset and a liability in the statement of
financial position

Unearned Revenue

 this is revenue already received by the company but not yet earned as of balance sheet date.

 it is a liability account

 rental income received in advance from a tenant, subscription received in advance from
subscribers

 there are two method of accounting for unearned revenues: Liability Method (initially recorded
as a liability) and the Revenue Method (initially recorded as a revenue)

Unearned Revenue

Liability Method

A. To record receipt of cash

Cash xxx

Unearned Income xxx

To record the adjusting entry

Unearned Income xxx

Income xxx

Revenue Method

Cash xxx

Income xxx

Income xxx

Unearned Income xxx

Illustration 1: On August 1, 2020, the company received Php. 120,000 representing a one (1) year rental
payment from a tenant. The entry to record the receipt of payment from the tenant on August 1 and the
adjusting entry on December 31 under the two methods are presented below:
LIABILITY METHOD REVENUE METHOD
Aug. 1, 2020 Cash 120,000.00 Aug. 1, 2020 Cash 120,000.00
Unearned Rent 120,000.00 Rent Income 120,000.00
To record the receipt of cash To record the receipt of cash

Dec. 31, 2020 Unearned Rent 50,000.00 Dec. 31, 2020 Rent Income 70,000.00
Rent Income 50,000.00 Unearned Rent 70,000.00
(120,000 x 5/12) (120,000 x 7/12)
To record the earned portion of rent To record the unearned portion of rent

Prepaid Expenses

 are assets purchased by the entity to be used in the business operations but have not yet
consumed as of the statement of financial position date (expense paid in advance)

 it is an asset account

 examples are prepaid rent, supplies on hand and prepaid insurance

Prepaid Expense

Asset Method

A. To record payment of cash

Prepaid Expense xxx

Cash xxx

To record the adjusting entry

Expense xxx

Prepaid Expense xxx

Expense Method

Expense xxx

Cash xxx

Prepaid Expense xxx

Expense xxx

Illustration 2: On April 1, the company paid in advance insurance of Php. 240,000 covering a period of
one year. The entry to record the purchased insurance on April 1 and the adjusting entry on December
31 under two methods are as follows:
 ASSET METHOD EXPENSE METHOD
Apr. 1, 2020 Prepaid Insurance 240,000.00 Apr. 1, 2020 Insurance Expense 240,000.00
Cash 240,000.00 Cash 240,000.00
To record the payment of the insurance To record the payment of the insurance

Dec. 31, 2020 Insurance Expense 180,000.00 Dec. 31, 2020 Prepaid Insurance 60,000.00
Prepaid Insurance 180,000.00 Insurance Expense 60,000.00
(240,000 x 9/12) (10,000-8,000)
To record the used portion of the insurance To record the unused portion of supplies

Non-Cash Adjustments

this include non-cash adjusting entries such as depreciation expense, allowance for doubtful accounts,
etc

Depreciation

 is the assigning of a plant assets’ cost to expense over its useful life.

 systematic and rational allocation of the depreciable asset over its useful life (PAS 16)

 Depreciation Expense is the amount of depreciation that is reported on the statement of

comprehensive income as part of the operating expense.

Three (3) Factors in the computation of Depreciation Expense:

1. Asset Cost – amount paid to acquire or purchase a depreciable asset

2. Estimated Realizable Value ( Salvage Value, Scrap Value) – it is the amount that the company
can probably sell the asset at the end of its estimated useful life.

3. Estimated Useful Life – it is the number of periods that the company can make use the asset

4. there are several methods of recording depreciation such as the straight-line method, declining
balance or double declining balance method

5. Straight-line Method

Asset Cost −Estimated SalvageValue

Depreciation Expense=
Estimated Useful Life
Pro-forma Entry:

Depreciation Expense xxx

Accumulated depreciation xxx

Illustration 1: On August 1, 2020, the company purchased a machine amounting to Php. 110,000. The
machine has an estimated life of 5 years and has a residual value of Php. 10,000. The entry to record the
depreciation expense on December 31, will be:

Initial Entry:

Machine 110,000

Cash 110,000

To record the purchase of the machine

Adjusting Entry:

Depreciation Expense - Machine 8,333

Accumulated Depreciation - Machine 8,333

To record the purchase of the machine

Computation:

5
Depreciation Expense=(110,000−10,000)/(5 years x( ))
12
Doubtful Accounts

 represents the portion of accounts receivable which are considered uncollectible

 known as the bad debts expense or doubtful account expense

Methods of Accounting for Bad Debts

Allowance Method – recognizes bad debts when the account is doubtful of collection (GAAP recognized)

Direct Method – recognizes bad debts only when the accounts are proven to be worthless or
uncollectible (BIR recognized)

Proforma Entry:

Bad Debts Expense xxx

Allowance for Doubtful Accounts xxx

Methods of Estimating Doubtful Accounts

Percentage of Credit Sales – doubtful account expense is based on the total sales multiplied by a certain
rate

Illustration: Percentage of Credit Sales

Ivonne Company are on credit basis. The following information is available for 2020:

Allowance for Doubtful Accounts – Beg. 180,000

Sales 9,500,000

Sales Return 800,00

Ivonne provides for doubtful accounts expense at the rate of 3% of net sales.

Illustration: Percentage of Credit Sales

Doubtful Accounts Expense (3% x [9,500,000-800,000]) 261,000.00

Add: Allowance for Doubtful Accounts, beg 180,000.00
Required Balance ( Ending Balance) 81,000.00
Adjusting Entry:

Doubtful Account Expense 261,000

Allowance for Doubtful Account 261,000

Methods of Estimating Doubtful Accounts

Percentage of Accounts Receivable – the required balance (ending balance) of the allowance for
doubtful account is based on the total ending balance of the trade accounts receivable

Illustration: Percentage of Ending A/R

Irish Company has a balance of trade accounts receivable amounting to Php. 5,000,000 and it has a
credit beginning balance of allowance for doubtful accounts of Php. 20,000. Irish estimates that the
doubtful account is 1% of the trade accounts receivable.
Required Allowance (Ending Balance) (5,000,000 x 1%) 50,000.00
Less: Beginning Balance (credit balance) 20,000.00
Doubtful Account Expense 30,000.00

Adjusting Entry:

Doubtful Account Expense 30,000

Allowance for Doubtful Account 30,000

Methods of Estimating Doubtful Accounts

Aging of Accounts Receivable– involves analyzing the accounts receivable where they are classified into
group of due and past due accounts instead of applying the overall percentage to the total accounts
receivable

Illustration: Aging of Accounts Receivable

Ivan Company began operation on January 2, 2019, On January 1, 2020, the company has a credit
beginning balance of allowance for doubtful account amounting to Php. 500,000. On December 31,
2020, the summary of aging of receivable is shown below:

% of Required
Due Balance
uncollectible Allowance
1-30 days past due 50,000,000.00 1% 500,000.00
31-60 days past due 20,000,000.00 2% 400,000.00
61-90 days past due 12,000,000.00 3% 360,000.00
91-120 days past due 5,000,000.00 5% 250,000.00
121-180 days past due 1,500,000.00 10% 150,000.00
181-365 days past due 200,000.00 15% 30,000.00
More than one year 30,000.00 40% 12,000.00
88,730,000.00 1,702,000.00

Illustration: Aging of Accounts Receivable

Required Allowance (Ending Balance) 1,702,000.00

Less: Beginning Balance (credit balance) 500,000.00
Doubtful Account Expense 1,202,000.00
Adjusting Entry:

Doubtful Account Expense 1,202,000

Allowance for Doubtful Account 1,202,000