FUNDAMENTALS
OF
ACCOUNTING
Ms. Maryvin M. Maluya, CPA, CTT
Lesson 4 (Part 1)
PREPARATION OF
FINANCIAL STATEMENTS
(Deferral)
Steps in the Accounting Cycle
Phase 2- Summarizing and Reporting Process
Step 5- Adjusting entries. Making end of period
adjustments before financial statements are prepared so
that the income and expense in the income statement are
reported at their correct amounts.
Step 6- Worksheet. Work sheet is prepared to facilitate
the preparation of financial statements.
Phase 2- Summarizing and Reporting Process
Step 1- Documentation
Step 2- Journalizing
Step 3- Posting
Step 4- Preparation of Unadjusted Trial Balance
Step 5- Adjusting Entries
File of Source Journaliz
documents; Post in Adjust
e in
Analyze the books Unadjusted ing
books of
business of final Trial Balance entrie
original
transactions entry s
entry
DEFERRAL
❑ Income already collected but will be earned over
the succeeding periods. (Deferred Income)
✔ Precollected Income
✔ Unearned Income
❑ Expenses already paid for but will be incurred
over the future periods. (Deferred Expenses)
✔ Prepaid expenses
✔ Unused expenses
✔ Unexpired expenses
DEFERRAL
❑ Long-term assets that are expected to be useful
for several years. (Depreciation or
amortization)
❑ Receivables and income that are already
recognized, but which may not be realized.
(Doubtful accounts or uncollectible accounts
expense)
❑ Goods to be resold that are already purchased.
(Merchandise inventory or Ending inventory)
MIXED ACCOUNTS
Mixed accounts have both the real or permanent,
and nominal or temporary components in them.
Mixed account
(before adjusting entries are prepared)
Permanent component Temporary component
(reported in the (reported in the
Balance Sheet) Income Statement)
MIXED ACCOUNTS
❑ Five examples of situations that give rise to
mixed accounts are:
❖ Assume that there was an advance collection of
rent during the period. The account credited at
that time, whether it is rent income or unearned
rent income is a mixed account before the
adjusting entries are prepared.
Earned portion Unearned portion
(INCOME) (LIABILITY)
MIXED ACCOUNTS
❑ Five examples of situations that give rise to
mixed accounts are:
❖ Assume that an enterprise took a 3-year
insurance policy. The account debited upon
payment of the whole premium, whether it is
insurance expense or prepaid insurance.
Expired portion Unexpired portion
(which is already an (which is still an
EXPENSE) ASSET)
MIXED ACCOUNTS
❑ Five examples of situations that give rise to
mixed accounts are:
❖ Assume that equipment that is expected to be
useful for 4 years. The account equipment
becomes a mixed account as time goes by.
Depreciation Remaining book value
(reported as an expense (reported as an asset
in the income statement) in the balance sheet)
MIXED ACCOUNTS
❑ Five examples of situations that give rise to
mixed accounts are:
❖ Accounts receivable is a real account if its
balance is fully realizable or collectible.
However, if a part of the receivable is doubtful of
collection, then accounts receivable is part asset
and part expense.
Uncollectible or doubtful Only the collectible portion
of collection of the receivable
(reported as an expense (reported as an asset in the
in the income statement) balance sheet)
MIXED ACCOUNTS
❑ Five examples of situations that give rise to
mixed accounts are:
❖ A merchandising enterprise buys goods for
resale to customers. Upon purchase, the
account merchandise purchases, purchases or
merchandise inventory may be debited. These
accounts become mixed accounts, if some of
the goods are already sold and some are still
unsold.
SOLD Portion UNSOLD Portion
(reported as an expense (reported as an asset in the
in the income statement) balance sheet)
Precollected or Unearned Income
INCOME METHOD:
Upon collection: Upon adjustment:
Credit an Transfer Credit a
INCOME UNEARNED LIABILITY
account portion account
* After the adjustment, the remaining balance in
the income account is the earned portion.
Precollected or Unearned Income
LIABILITY METHOD:
Upon collection: Upon adjustment:
Credit a Transfer Credit an
LIABILITY EARNED INCOME
account portion account
* After the adjustment, the remaining balance in
the liability account is the unearned portion.
Precollected or Unearned Income
Precollected or Unearned Income
❑ Case 1- On December 1, 2019, Fame Realty collected P75,000
representing the rent for 5 months, until April 30, 2020.
INCOME METHOD:
Upon collection, the income account is credited:
Upon adjustment, recognize the unearned portion:
Precollected or Unearned Income
❑ Case 1- On December 1, 2019, Fame Realty collected P75,000
representing the rent for 5 months, until April 30, 2020.
LIABILITY METHOD:
Upon Collection, the liability account is credited:
Upon adjustment, recognize the earned portion:
Precollected or Unearned Income
❑ Case 2- On November 1, 2019, Atty. Anita Mijares received P30,000 as
her retainers fees for professional services rendered until January 31,
2020.
INCOME METHOD:
Upon collection, the income account is credited:
Upon adjustment, recognize the unearned portion:
Precollected or Unearned Income
❑ Case 2- On November 1, 2019, Atty. Anita Mijares received P30,000 as
her retainers fees for professional services rendered until January 31,
2020.
LIABILITY METHOD:
Upon collection, the liability account is credited:
Upon adjustment, recognize the earned portion:
Prepaid or Unexpired Expenses
EXPENSE METHOD:
Upon payment: Upon adjustment:
Debit an Transfer Debit an
EXPENSE UNUSED ASSET
account portion account
* After the adjustment, the remaining balance in
the expense account is the used portion.
Prepaid or Unexpired Expenses
ASSET METHOD:
Upon payment: Upon adjustment:
Debit an Transfer Debit an
ASSET USED EXPENSE
account portion account
* After the adjustment, the remaining balance in
the asset account is the unused portion.
Prepaid or Unexpired Expenses
Prepaid or Unexpired Expenses
❑ Case 1- Paid insurance premium of P3,600 on May 1, 2019. The
premium paid is good for a period of one year, until April 30, 20-2.
EXPENSE METHOD:
Upon payment, the expense account is debited:
Upon adjustment, recognize the unexpired or unused portion:
Prepaid or Unexpired Expenses
❑ Case 1- Paid insurance premium of P3,600 on May 1, 2019. The
premium paid is good for a period of one year, until April 30, 20-2.
ASSET METHOD:
Upon payment, the asset account is debited:
Upon adjustment, recognize the expired or used portion:
Prepaid or Unexpired Expenses
Case 2- Bought office supplies on August 18, 20-1, P4,280. As of December
31, 20-1, approximately ¾ of the supplies have been used up.
EXPENSE METHOD:
Upon payment, the expense account is debited:
Upon adjustment, recognize the unexpired or unused portion:
Prepaid or Unexpired Expenses
Case 2- Bought office supplies on August 18, 20-1, P4,280. As of December
31, 20-1, approximately ¾ of the supplies have been used up.
ASSET METHOD:
Upon payment, the asset account is debited:
Upon adjustment, recognize the expired or used portion:
DEPRECIATION of Fixed Assets
Criteria for Fixed Assets:
Fixed assets include those assets that meet the
following three criteria:
They have relatively long life,
They are acquired for use in the normal
operations of the business, and
They are not primarily intended for sale.
COMPUTATION of the Periodic Depreciation
DEPRECIATION = Cost of the fixed asset – Expected residual
value
Estimated useful life of the fixed asset
Recording and Reporting the Periodic Depreciation:
Recording Periodic Depreciation:
Dec 31 Depreciation Expense- Building Pxx
Accumulated Depreciation - Building Pxx
Reporting the Periodic Depreciation:
Non-current assets:
Land Pxx
Building Pxx
Less: Accumulated Depreciation PxxPxx
DEPRECIATION of Fixed Assets
ILLUSTRATION:
Enterprise B purchased a machine for use in its
shop for P43,000 on June 15, 20-5. Before the
machine is ready for normal use on July 2, the
business incurred additional costs of P5,000. It
is estimated that the machine will be useful for
4 years, after which it is expected to be sold for
P8,000.
Uncollectible or Doubtful Receivables
Accounts receivable is usually reported in the
balance sheet at its net realizable value, which
is the amount expected to be collected in cash.
Estimating the Doubting Accounts
Estimating the doubtful accounts, also known as
bad debts or uncollectible accounts, makes use
of a carefully computed percentage of loss.
Two methods:
Percentage of sales method
Percentage of receivables method
Recording and Reporting the Estimated Doubtful Accounts
Recording Periodic Depreciation:
Dec 31 Doubtful Accounts Pxx
Allowance for Doubtful Accounts Pxx
or
Dec 31 Uncollectible accounts Pxx
Allowance for Uncollectible accounts Pxx
Recording and Reporting the Estimated Doubtful Accounts
Reporting the Periodic Depreciation:
Current assets:
Cash Pxx
Accounts Receivable Pxx
Less: Allowance for Doubtful Accounts PxxPxx
or
Current assets:
Cash Pxx
Accounts Receivable, net of allowance for
doubtful accounts of Pxx Pxx
Estimating the Doubting Accounts
Percentage of Sales Percentage of Receivables
Method Method
Formula to use: Sales x Computed rate Accounts and/or notes
receivables x Computed rate
Amount Doubtful account Allowance for doubtful
computed with expense that will be accounts balance that will
the use of the reported in the income be reported in the balance
above formula statement. sheet.
is:
Amount of Amount computed with Amount computed with the
doubtful the use of the formula. use of the formula, minus
account is: the existing balance of the
allowance before
adjustment.
Emphasis is on Income statement Balance sheet presentation.
the: presentation.
