CHAPTER 2

Name: year & course:

Subject:

Review Questions…

1. What is accounting?
 It is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities that is intended to be useful in
making economic decisions.
2. What are the (4) four phases of accounting?
 Recording, classifying, summarizing, interpreting
3. What is the accounting cycle?
 Is a collective process of identifying, analyzing, and recording the accounting
events of a company.
4. Discuss the relationships of bookkeeping and accounting.
 The relationship of bookkeeping and accounting can be transcribed into a
common saying that “ one is useless without the other, while the bookkeeping
does the “how accounting is done” which refers to the mechanical aspects,
professional accountant does the “ why accounting is done”.
5. Enumerate the (9) nine steps of the accounting process.
 Analyze business transaction
 Journalize transaction
 Posting to ledger account
 Preparing trial balance
 Journalize and post adjustments
 Prepare adjusted trial balance
 Prepare financial statements
 Journalize and post-closing entries
 Preparing post-closing trial balance
6. Define a business transaction.
 A business transaction is an activity or event that can be measured in terms of
money and which affects the financial position or operations of the business
entity.
7. What is an account?
 An account refers to assets, liabilities, income, expenses, and equity, as
represented by individual ledger pages, to which change in value are
chronologically recorded with debit and credit entries.
8. What is an account balance?
 Is the amount of money you have available in your checking or savings account.
9. What is debit entry? A credit entry?
 Debit entry increase asset or expense accounts and decrease liability, revenue or
equity accounts.
 Credit entry is used to decrease the value of an asset or increase the value of a
liability.
10. State the rules of debit and credit in accounting.
 A debit is an entry made on the left side of an account. Debits increase an asset
or expense account or decrease equity, liability, or revenue account.
 A credit is an entry made on the right side of an account. Credits increase equity,
liability, and revenue accounts and decrease asset and expense account.
11. What are the factors that will increase an owner’s equity?
 Investment of owner
 Revenues
12. What are the factors that will decrease an owner’s equity?
 Withdrawal by owner
 Expenses
13. Does the word “debit” mean increase?
 Increase in costs and expenses
14. Does the word “credit” mean an decrease?
 Decrease costs and expenses
15. What account that is used to effect reduction of owner’s equity due owner’s drawing?
 Drawing or personal
2.1 QUIZZERS……

Instructions: write letter “T” if the statement is correct and letter “F” if incorrect.

__ F 1. The left-hand side of an account refers to its credit side while the right-hand side
refers to the debit side.
_T__ 2. The debit side of an account is for the value received while the credit side is for the value
parted with in an transaction analysis.
F__ 3. Business transactions are analyzed from the point of the business rather than the owner.
_T__4. The term “value” refers to the 3 (three) accounting elements which are the assets, liabilities,
and owner’s equity.
__T_ 5. An asset’s normal balance is a debit while that of a liability, credit.
____ 6. To debit an asset is to increase the balance of its account while to credit is to decrease its
balance.
__T_ 7. Accounting cycle refers to the steps of the accounting process.
__T_ 8. Creditors are given the first priority over the assets of the business in case of liquidation.
__F_ 9. The fundamental accounting equation is A = L + P or can be expressed as A – L= P.
__T_10. Operating cycle is the interval of time from the date merchandise is acquired, sell the
merchandise to the customers and the ultimate collection of cash from the sale.
__T_ 11. The reason why land is not subjected to depreciation because it is expected to be useful to
the business enterprise for an indefinite period of time.
__T_ 12. When drawing account is debited, the balance of the account decreased.
__F_ 13. The expanded accounting equation is A = L+P (income-expenses).
__T_ 14. When a debit entry is bigger that the credit entry, the account is said to have a debit
balance.
__T_ 15. Withdrawals by the proprietor has the effect of reducing profit for the period.
__T_ 16. Payment of a liability has the effect of reducing cash balance.
__T_ 17. Prepaid expenses are assets and must be shown in the balance sheet.
__T_ 18. Collection from a customer’s account will affect the balance sheet account only.
__T_ 19. Unearned income is an account title for an income collected or received in advance
although not yet earned.
__T_ 20. Accrued expenses has a semblance of a liability account.
__T_ 21. Sales discounts and Sales Returns & Allowances are both reduction from Sales Account.
__T_ 22. Purchase discounts and purchase returns & allowances are reduction from purchase
account.
__T_ 23. Freight-in is an addition to purchase account.
__T_ 24. Freight-out is an addition to sales account.
__T_ 25. Sales like a service income account has a credit balance.
__T_ 26. Purchase discount has a credit balance.
__T_ 27. Sales discount has a credit balance.
__T_ 28. Purchases and sales accounts have a normal balances of debit and credit respectively.
__T_ 29. When merchandise is purchased for cash, it is debited to “purchase” account.
__T_ 30. When merchandise is sols on account, collection should be credited to accounts payable.
2.2 MULTIPLE CHOICE
Instructions: Encircle the letter of the correct answer in each of the given questions:
1. It is the assigning of peso or monetary values involved in a transaction-
a. identifying c. classifying
b. measuring d. summarizing
2. The phase of accounting which involves the routine and mechanical process of writing down
the business transactions and events in a chronologically manner in the books of accounts-
a. recording c. summarizing
b. classifying d. interpreting
3. The phase of accounting which involves the sorting or grouping of similar transactions events
into their respective kinds and classes-
a. recording c. summarizing
b. classifying d. interpreting
4. The interpreting phase of accounting relates to-
a. gathering of information data c. recording of the data gathered
b. processing of data gathered d. communicating of the analyzed data
5. Bookkeeping is the process of recording business transaction is a systematic manner.
Systematic means-
a. it is based on accountant’s judgement c. reliability of the accounting data
b. free from bias d. it follows procedures and principles
6. Chronological recording of transactions is very essential in bookkeeping process.
Chronological means-
a. the debit is equal to credit c. based on accounting document
b. based on the date of occurrence d. based on timely recording
7. The financial statements rely information which are based on past events and transactions of
the business, hence financial statements are-
a. historical in nature c. systematic in nature
b. financial in character d. informative in nature
8. The accounts that are used to effect reduction of capital other than drawings are-
a. income and expenses c. only expense
b. only income d. all of the above
9. Which of the following statements about an “account” is not true-
a. an account consists of two parts c. the left-side is the debit side
b. it is a T-account form d. the right-side is the increase side
10. An account is said to have a debit balance when-
a. total debit and total are equal c. total debit exceeds total credit
b. total credit exceeds total debit d. they are “in balance”
11. A liability account has a normal balance of a-
a. debit balance c. debit entry
b. credit balance d. credit entry
12. The “give and take” process of accounting is referred to as –
a. analysis of transaction c. accounting function
b. recording function d. business operation
13. Are identification or brief description of items that fall to same kind, class or nature-
a. account tittle c. accounting procedure
b. accounting terminologies d. accounting standards
14. “Debere” and Credere” are taken from-
a. Japanes words c. Latin words
b. Greek words d. Arabic words
15. The left-hand side of an account refers to-
a. debit side c. increase side
b. credit side d. decrease side
16. A debit entry may signify an increase in-
a. revenue c. asset
b. owner’s equity d. liability
17. A debit entry may signify a decrease in-
a. asset c. expense
b. liability d. drawing
18. A credit entry may signify an increase in-
a. asset c. owner’s equity
b. drawing d. drawing
19. A credit entry may signify a decrease in-
a. revenue c. owner’s equity
b. expense d. liability
20. When a customer’s account is collected in full-
a. total asset increases c. total asset remained the same
b. total asset decreases d. none of the above
21. When supplier’s account is paid in full, there will be a-
a. decrease in liability and increase in asset
b. increase in asset and decrease in liability
c. decrease in liability and decrease in asset
d. none of the above
22. Sales Returns & Allowances and Sales Discounts are both reduction from the sales account.
what is the normal balance of sales account?
a. debit balance c. debit and credit balance
b. credit balance d. none of the above
23. The adjunct account of purchase is the-
a. freight-in c. purchase discount
b. freight-out d. purchase returns and allowances
 24. Purchase Returns & Allowances and Purchase Discount are both reduction from Purchases
account. What is the normal balance of the account, “Purchase”?
a. debit balance c. debit and credit balance
b. credit balance d. none of the above
25. Freight out is recorded in the book of the business-seller-
a. as an expense c. as a liability
b. as an asset d. as cost
26. Freight-in is recorder in the book of business as forming part of-
a. cost c. expense
b. asset d. none of these
27. When merchandise, goods or commodities are purchased, the account purchases will be-
a. debited to an asset account c. debited to liability account
b. debited to cost account d. debited to equity account
28. When sales account increased its balance, it should have been-
a. debited c. no effect
b. credited d. VAT is not recorded
29. When a company collects in full a merchandise sold on account-
a. Sales is credited c. Cash account is credited
b Accounts Receivable is credited d. VAT is not recorded
30. When a company sold merchandise on account, the account credited is-
a. Sales c. Cash in Bank
b. Accounts Receivable d. Vat input

EXERCISES AND PROBLEMS………

2-1 TRANSACTION ANALYSIS
The scrambled transactions of Mr. Raymundo Dolor are narrated below:
a) Mr. Raymundo Dolor invests cash in the business where he opened an account with Bank of
the Philippines islands, P250,000.
b) Withdraw cash from the bank to pay for business permits to the city government, P5,000.
c) Received cash for services rendered and deposited in the bank, P4,000.
d) Bought office supplies on account from NCCC MALL, P2,000.
e) Withdraw cash from the bank for his personal use, P10,000.
f) Withdraw cash from the bank for partial payment of account with NCCC MALL, P1,000.
g) Rendered services on account to various clients, P3,500.
h) Withdraw cash from the bank for payment of salaries to his employees, P10,000.
i) Collected P2,000 from a client’s account and immediately deposited to the bank.
 ANALYSES
Transaction Value Received Valued Parted With
No. or Debit Amount or Credit Amount_
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
_________ _____________ __________ ________________ _________
Total P P
========== =========
Requirements:
1. Determine the value received and value parted with. Place the corresponding amount.
2. Total the amount of the value received and that of the value parted with columns.
3. Check if the totals of the two columns are equal.

2-2 Determination of Value Received and Value Parted With

Instructions: Determine the Value Received or Debit and Value Parted With or Credit and indicate
the account classification as to Asset, Liability, Owner’s Equity, Income and Expenses.
The transaction on Sept.1 is answered for your guide.

Valued Received Account Valued Parted With Account

Date___ or Debit Classification or Credit Classification
Sept. 1 __Cash________ __Asset_____ _j,Matero,Capital_ Owner’s Equity
3 ______________ ____________ _______________ _____________
5 ______________ ____________ _______________ _____________
8 ______________ ____________ _______________ _____________
10 ______________ ____________ _______________ _____________
12 ______________ ____________ _______________ _____________
14 ______________ ____________ _______________ _____________
16 ______________ ____________ _______________ _____________
17 ______________ ____________ _______________ _____________
20 ______________ ____________ _______________ _____________
22 ______________ ____________ _______________ _____________
29 ______________ ____________ _______________ _____________
30 ______________ ____________ _______________ _____________

The following were the transactions of Mrs. Jane Matero during the month of September 20A:
Sept. 1 Jane Matero invested cash in the business.
3 Rendered service on account.
5 Borrowed money from a bank with a note issued.
8 Received cash from services rendered.
10 Jane Matero withdraw cash from the business.
12 Paid business permits.
14 Received a promissory note for services rendered.
16 Made additional investment-Computer.
17 Collected a customer’s account.
20 Paid postage and stamps.
22 Paid light and water bills (Utilities Expenses)
 29 Collected cash for promissory note received in Sept. 14.
30 Paid salaries to employees.

2-3

Instructions: The following “paired” transactions are related to each others. Determine the value
received or debit and the value parted with of credit. (Assume that periodic system
is used for merchandising)

Debit Credit

A – 1 – L. Aguilar invested cash in the business. _______ ________

2 – L. Aguilar withdraw cash from his business. _______ ________

B – 1 – Bought supplies inventory on account from J. te Company _______ ________

2 - Paid our account with J. Te Company _______ ________

C – 1 – Rendered services on account to M. Penaflor Company _______ ________

2 – Collected the account of M. Penaflor Company _______ ________

D – 1 – Bought a car for cash from Toyota. _______ ________

2 – Sold a car for cash to Mr. R. Baligala. _______ ________

E – 1 – Bought merchandise for cash from SM Superstore _______ ________

2 – Sold merchandise for cash to R. Berhay & Company _______ ________

F – 1 – Bought merchandise on account from E. Yee Trading _______ ________

2 – Paid our account with E. Yee Trading. _______ ________

G – 1 – Sold merchandise on account to M. Rendon Company _______ ________

2 – Collected the account from M. Rendon Company _______ ________

H- 1 – Paid freight for merchandise sold. _______ ________

2 – Paid freight for merchandise purchased. _______ ________

I – 1 – Received a note for the merchandise sold. _______ ________

2 – Collected cash for the note received. _______ ________

J – 1 – Issued a note for the merchandise purchased. _______ ________

2 - Paid cash for the note issued. _______ ________
 2- 4

Instructions: The following account titles are given for a Merchandising Business. Determine the
accounts debited and credited with their respective amounts.

ASSETS REVENUE

Cash in Bank Sales

Accounting Receivable Sales Discounts
Building Sales Returns and allowances
Furniture and Fixtures
Office Machines and Equipment COSTS

LIABILITIES Purchases
Purchase Discounts
Notes Payable Purchase Returns & Allowances
Accounts Payable Freight-In

CAPITAL EXPENSES

F, Opiso, Capital Freight Out

F, Opiso, Drawing Salaries

The transactions were as follows:

1. Felipe Opiso invested P600,000 cash to start with a merchandising business.

Debit, __________________________
Credit, _____________________________

2. Purchased merchandise for cash of P150,000 from F. Solis Supermart.

Debit, _________________________
Credit, ____________________________

3. Paid cash of P1,200 for freight and handling on purchases.

Debit, _________________________
Credit, _____________________________

4. Returned P2,000 cost of merchandise to F. Solis Supermart due to bad replacements were
made.
Debit, ________________________
Credit, _____________________________

5. Purchased merchandise on account, P85,000 from V, Ruben Mall.

Debit, ________________________
Credit, ____________________________

6. Paid the account with V. Ruben Mall, P85,000 less 5% discount for early payment.
Debit, ________________________
Credit, ____________________________
7. Mr. F. Opiso has withdrawn P20,000 for his personal use.
Debit, _______________________
Credit, ____________________________

8. Sold merchandise on account, P65,000 to C. Fornillos Superstore.

Debit, ______________________
Credit, ___________________________

9. Received merchandise worth P5,000 returned by C Fornillos Superstore due to sizes

difference.
Debit, _____________________
Credit, __________________________

10. Sold merchandise for cash , P 58,000 to L. Medina Convenience Store.

Debit, ____________________
Credit, _________________________

11. Paid cash of P1,000 for freight and handling on merchandise shipped to L. Medina
Convenience Store.
Debit, ____________________
Credit, ________________________

12. Collected the account of C. Fornillos Superstore the amount of P60,000 less 3% discount for
early payment of account.
Debit, ____________________
Credit,_________________________

13. Purchased merchandise on account costing P100,000 from Judylaine Berhay Market Basket
and issued a promissory note.
Debit, ___________________
Credit, ________________________

14. Paid the account with Judylaine Berhay Market Basket and get the promissory note.
Debit, ___________________
Credit, ________________________

15. Sold merchandise on account worth P35,000 to B. Sorima Company and received a
promissory note.
Debit, __________________
Credit, _______________________

16. Collected cash of P35,000 from payment of B. Sorima Company account and returned the
promissory note.
Debit, __________________
Credit, ______________________
 2–5

Instructions: On the space provided, indicate a “check mark” as to what normal balance the
following account have.

Debit Credit

Sample: Cash on Hand ______ ______

1. Freight Out ______ ______
2. Estimated uncollectible accounts ______ ______
3. Accounts Receivable ______ ______
4. Service income ______ ______
5. Annabelle Linobo, Capital ______ ______
6. Purchases ______ ______
7. Freight- in ______ ______
8. Accounts payable ______ ______
9. Petty cash fund ______ ______
10. Cash in bank ______ ______
11. Land ______ ______
12. Furniture and Fixtures ______ ______
13. Sales ______ ______
14. Taxes and Licenses ______ ______
15. Building ______ ______
16. Sales returns and allowances ______ ______
17. Purchase discounts ______ ______
18. Sales discounts ______ ______
19. Purchase returns and allowances ______ ______
20. Notes receivable ______ ______
21. Accumulated Depreciation ______ ______
22. Annabelle Linobo, Drawing ______ ______
23. Unearned Sales Revenue ______ ______
24. Accrued interest income ______ ______
25. Prepaid Expenses ______ ______
 2–6
Instructions: On the space provided, indicate a “check mark” as to the effect on the balance of the
following accounts.

Increased Decreased

Sample: Cash in Bank account was debited ________ _________

1. Accounts Receivable account was credited ________ _________
2. Service Income account was credited ________ _________
3. Accounts payable account was debited ________ _________
4. Claro Ventic, capital account was credited ________ _________
5. Sales account was credited ________ _________
6. Freight –in account was debited ________ _________
7. Salaries expenses was debited ________ _________
8. Prepaid insurance account was credited ________ _________
9. Purchases account was debited ________ _________
10. Sales Returns & Allowances account was debited ________ _________
11. Freight Out account was debited ________ _________
12. Purchase Discounts account was credited ________ _________
13. Notes Payable account was debited ________ _________
14. Notes Receivable account was credited ________ _________
15. Accumulated Depreciation account was credited ________ _________
16. Estimated uncollectible account was debited ________ _________
17. Claro Ventic, Drawing account was debited ________ ________
18. Sales discount account was credited ________ ________
19. Purchase returns & allowances was credited ________ ________
20. Rent expense account was credited ________ ________
21. Uncollectible account was debited ________ ________
22. Supplies expense account was debited ________ ________
23. Accounts receivable account was debited ________ ________
24. Accounts payable account was credited ________ ________
25. Prepaid insurance account was debited ________ ________
2-7

Original New
Balance Balance

1. Accounts receivable was debited by P5000 P 25,000 _________

2. Accounts payable was debited by P8000 P 11,000 _________
3. Sales was credited by P100,000 P 150,000 _________
4. Purchases was credited by P20,000 P70,000 _________
5. Freight-in was credited by P3,000 P10,000 _________
6. Sales returns & allowances was credited by
P5,000 P15,000 _________
7. Cash on hand was debited by P4,000 P20,000 _________
8. Rent expense was debited by P4,000 P13,000 _________
9. Sales discounts was credited by P7,000 P12,000 _________
10. Freight out was credited by P2,000 P14,000 _________
11. Purchase returns & allowance was debited by
P4,000 P7,000 _________
12. Purchase discounts was debited by P5,000 P6,000 _________
13. Prepaid insurance was credited by P6,000 P18,000 _________
14. Service income was credited by P20,000 P25,000 _________
15. Notes payable was credited by P15,000 P20,000 _________
16. Notes receivable was credited by P10,000 P30,000 _________
17. Ian Abuzo, capital was credited by P100,000 P150,000 _________
18. Ian abuzo, drawing was debited by P20,000 P15,000 _________
19. Professional income was debited by P2,000 P16,000 _________
20. Estimated uncollectible account was credited
By P10,000 P25,000 _________
21. Supplies inventory was credited by P1,000 P9,000 _________
22. Uncollectible account was debited by P3,000 P2,000 _________
23. Ian abuzo, capital was debited by P5,000 P50,000 _________
24. Ian abuzo, drawing was credited by P7,000 P25,000 _________
25. Supplies inventory was debited by P3,000 P10,000 _________
2-8
Owner’s Equity
Capita Drawing Revenu Costs Expense
l e s
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Sales
2 Freight-in
3 Freight-out
4 Kareem
Palmes,capital
5 purchases
6 Kareem palmes,
drawing
7 Purchase
discounts
8 Sales ret. &
allow.
9 Purchase ret. &
allow.
1 Sales discounts
0
1 Income from
1 repairs
1 Taxes and
2 license
1 Service income
3
1 Gas & oil
4
1 Utilities expense
5