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Accounting 101
The Accounting Process
The steps in the Accounting cycle:
1. Transactions are documented.
2. Transactions are analyzed and recorded in the journal.
3. Entries are posted to the ledger.
4. Preliminary trial balance is prepared.
5. Adjusting entries are journalized and posted.
6. Adjusted trial balance is prepared.
7. Financial statements are prepared.
8. Books are closed.
9. Post-closing trial balance is prepared.
10. Reversing entries are journalized and posted.

 Steps 1 – 3 are part of the recording phase while the remaining steps are in the
summarizing phase.
 Step 10 is an optional step in the accounting process.

Let’s go through the steps one by one.

1. Transactions are documented

 Transactions are reportable events and affect the elements of financial statements.
 The entry to be made should reflect a transaction’s economic substance rather than its legal
form.
 Transactions are supported by business documents like, but not limited to:
o Sales invoice
o Purchase invoice
o Official receipts
o Check voucher
o Check stubs and cancelled checks
o Debit and credit memoranda
o Promissory notes

2. Journalizing Business Transactions

Double entry bookkeeping system – the system of analyzing the effects of transactions and recording
them in terms of debit and credit.
Journal – the book of original entry.
- The book where transactions are initially recorded in a systematic and chronological order.
- Where the debit and credit recording is made.
- Most basic form of a journal is the general journal.
Chart of accounts – a list of all the accounts of the business and their respective account numbers.
- Using this would reduce confusion as to the choice of account titles and permits uniformity in
recording routine transactions.
Simple journal entry – only one account debited and one account credited.
Compound journal entry – more than one account is involved in a single entry.
Memorandum entry – an entry which has no debit or credit, which shows only the date and a brief
explanation .

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3. Posting to the ledger

 The ledger is used to accumulate all the effects of the transactions during a period in specific
accounts.
Ledger – the book of final entry.
- A group of accounts.
- A general ledger contains the entire set of accounts used by a business.
- The effects of business transactions are summarized in individual accounts and each account has
an individual record in the ledger.

4. Preparing an unadjusted trial balance

 A listing of individual accounts, usually in financial statement order.
• Ending debit or credit balances are listed in two separate columns.
• Total debit account balances should equal total credit account balances.
 To determine the equality of the debits and credits in the general ledger, a trial balance is
prepared.
 The trial balance is a list of all accounts and their balances in the general ledger. It indicates
whether total debits equal total credits.
 Trial balance only proves that all entries recorded have equal debits and credits, it does not
guarantee that all transactions have been recorded.
 The total of the trial balance provides no meaningful amount, but the trial balance
summarizes the net effect of the transactions in each account in the general ledger for a
particular period. However, the trial balance cannot yet be used as the basis to prepare the
financial statements, since some accounts still need to be adjusted and updated.
Footing – adding all the debits and the credits.

5. Journalizing and Posting Adjusting Entries

 This step follows the principle of accrual basis of accounting.
 Under the accrual basis of accounting, revenues are recognized in the accounting period in which
they are considered earned and expenses are recognized in the accounting period in which they
are incurred, regardless of the inflow or outflow of cash. However, because during the reporting
period, cash receipts and cash payments primarily serve as the bases for recording income and
expenses, the accounting records need to be updated for revenues and expenses earned and
incurred but not yet collected or paid and for cash receipts and cash payments made during the
period but are not yet earned or incurred.
 Follows also the principles of matching (properly match revenues earned for the period with
expenses incurred for the same period) and going concern (the entity is assumed to continue its
operations for an indefinite future period of time, unless liquidation appears imminent)
 The going concern assumption provides the basis for the recognition of depreciation and deferrals
 An adjusting entry affects both a real and a nominal account.
Calendar year – one where the period ends in December 31.
Fiscal year – a period of 12 months that ends at any time except December 31.
Accrual basis – recognize income as it is earned regardless of when it is received; and expense as it is
incurred, regardless of when it is paid.
Cash basis – revenue and expenses are recognized or recorded only when they are received and paid,
respectively.

Two (2) types of adjusting entries:

1. ACCRUALS – Revenues earned or expenses incurred that have not been previously recorded.

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Revenues earned Cash received

-or- -or-
Expenses incurred Cash paid
(reporting period)

o Accrued expenses – expenses incurred during the accounting period but has not been paid
and is still unrecorded at year-end.
 Affects 3 concepts: (1) Expense recognition principle (2) liability recognition
principle (3) accrual basis assumption
 If not adjusted, expenses will be understated, profit will be overstated, Liabilities
will be understated, Equity will be overstated.
Pro-forma entry:
Expense xx
Liability xx

o Accrued revenues – revenue earned during the accounting period for which no cash has
been collected yet.
 If not adjusted, income will be understated, profit will be understated, assets will
be understated, Equity will be understated.
 Affects 3 concepts: (1) income recognition (2) asset recognition principle (3)
accrual basis assumption
Pro-forma entry:
Asset xx
Income xx

2. DEFERRALS – receipts of assets or payments of cash in advance of revenue or expense

recognition.

Cash received Revenues earned

-or- -or-
Cash paid Expenses incurred
(reporting period)

o Prepayments – cash paid not but not yet incurred.

 Opposite of accrued expense.
 3 concepts are involved: (1) expense recognition principle (2) asset recognition
principle (3) accrual basis assumption
Pro-forma entries:
Asset method: Expense method:
Original journal entry:
Prepaid expense xx Expense xx
Cash xx Cash xx

Adjusting entry:
Expense xx Prepaid expense xx
Prepaid expense xx Expense xx
Recognize the used portion Recognize the unused portion

o Deferred revenues – cash received but not yet earned.

 Opposite of accrued income.

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 3 concepts are involved: (1) income recognition principle (2) liability recognition
principle (3) accrual basis assumption.
Pro-forma entries:
Liability method: Income method:
Original journal entry:
Cash xx Cash xx
Liability xx Income xx

Adjusting entry:
Liability xx Income xx
Income xx Liability xx
Recognize the earned portion Recognize the unearned portion

NOTE: the method mentioned above is based on the ORIGINAL entry and whatever method you may
use in your computations, you will always arrive at the same answer.

Adjusting entries involving estimates:

1. DEPRECIATION
 The concept of depreciation involves the systematic and rational allocation of the cost of
long-lived assets over multiple accounting periods it is used to generate revenue (cost
allocation not valuation concept).
 Follows the matching principle.
 Property, Plant, and equipment are recorded at their acquisition cost:
1. The purchase price
2. Freight, insurance, installation, and other related expenses in bringing the assets for
use.
3. The initial estimate of the costs of dismantling and removing the item at the end of its
useful life.
 PPE, with the exception of land, are subject to depreciation.

Straight-Line method of depreciation: (the simplest and most widely used method of depreciation)

Cost−Residual value
Annual Depreciation=
Estimated useful life

Pro-forma entry:
Depreciation Expense xx
Accumulated Depreciation xx

 The use of the contra account allows the disclosure of the original cost of the asset in the
statement of financial position.
 Carrying value of PPE is computed as the difference of the cost and the accumulated
depreciation account.

2. BAD DEBTS EXPENSE

 Estimating uncollectible accounts on receivable accounts.
 Also known as Impairment of Receivables.
 The total amount of uncollectible accounts is an expense that arises by selling on credit.
 Net realizable value of Accounts receivable is equal to the difference of Accounts
receivable ending balance and Allowance for doubtful accounts balance.

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Two methods of recording bad debts:

1. DIRECT WRITEOFF – directly removes the estimated uncollectible amount from receivables
whether it is probable or not that the amount will not be collected.
o The only method allowed for income tax purposes.

Pro-forma entries:
Bad debts expense Xx
Accounts receivables xx

Recovery of accounts written off

Accounts receivables Xx
Bad debt recovery* xx

Cash Xx
Accounts receivable xx

* Bad debt recover is other income account.

2. ALLOWANCE METHOD – a more prudent method of estimating uncollectible accounts. It

sets up first an allowance account for the estimation of uncollectible accounts. Once it is probable
that the account is uncollectible, derecognize the allowance and remove the amount from
receivables.
 The accounts receivable account is not directly credited,
 If the base used for estimating uncollectible account is:
o A balance sheet account, the amount estimated is the required balance of the
allowance account.
o An income statement account, the amount estimated is an addition to the balance of
the allowance account.
 In contrast to the direct write-off method, recording write-offs and recoveries under the
allowance method does not affect profit.

Pro-forma entries:
Bad debts expense xx
Allowance for bad debts xx

Probable that the account is uncollectible

Allowance for bad debts xx
Accounts receivable xx

Recovery of accounts written off

Accounts receivable xx
Allowance for bad debts xx

Cash xx
Accounts receivable xx

Aging analysis of receivables – bad debt expense is computed under the premise that the longer
an amount is past due, the more likely it is to be uncollectible.

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- Higher percentage (%) will be assigned to older receivables and the lowest percentages to new
receivables or to those which are not yet due.

6. Adjusted trial balance is prepared.

 After journalizing and posting the adjusting entries, adjusted trial balance can be
prepared. The amounts here are all adjusted and updated. A worksheet is necessary to
complete this step.

Account: Unadjusted trial Adjustments: Adjusted trial Income Balance

balance: balance: Statement: Sheet:
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
xx xx Xx xx xx xx xx xx xx xx

7. Financial statements are prepared.

 After the completion of the worksheet, the financial statements are prepared, in the
following order:
1. Statement of comprehensive income
2. Statement of changes in equity
3. Statement of Financial Position
4. Statement of Cash flows
Financial statements – the means by which the information accumulated and processed in financial
accounting is communicated to the users.
- The end product or main output of the financial accounting process.
- Shows the results of the management’s stewardship of the resources entrusted to it.
- Shall be presented at least annually.
Accounts receivable – open accounts or those not supported by promissory notes.
Notes receivable – those supported by formal promises to pay in the form of notes.

Statement of comprehensive income

Comprehensive income – the change in equity during a period resulting from transactions and other
events, other than changes resulting from transactions with owners in their capacity as owners.
- Two (2) parts: (1) income statement (Profit or loss) (2) Other comprehensive income.

Profit or loss – the total income less expenses.

Income statement – a formal statement showing the financial performance of an entity for a given
period of time.
- Financial performance of an entity is primarily measured in terms of the level of income earned
by the entity through the effective and efficient utilization of its resources.

Statement of Financial Position

Statement of financial position – a formal statement of the assets, liabilities, and owner’s equity of the
business as of a given date.
- Investors, creditors, and other statement users analyze the statement of financial position to
evaluate liquidity, solvency, and the need of the entity for additional financing.
- Traditionally called the Balance sheet.

Formats:
1. Report form – lists the assets, followed by liabilities and the owner’s equity in a downward
sequence. (vertical)

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2. Account form - lists the assets on the left side while the liabilities and owner’s equity on the right
side, similar to an account in the ledger.

Current or Non-current classification:

 An entity shall present current and non-current assets, and current and non-current
liabilities, as separate classifications on the face of the statement of financial position.

Current assets:
An entity shall be classified as current when it satisfies any of the following criteria:
 It is expected to be realized in, or is intended for sale or consumption in, the entity’s normal
operating cycle.
 It is held primarily for the purpose of being traded.
 It is expected to be realized within 12 months after reporting period.
 It is cash or cash equivalent unless it is restricted from being used to settle a liability for at least
12 months after the reporting date.
Other than those mentioned above, all other assets shall be classified as non-current.

Current liabilities:
A liability shall be classified as current when it satisfies any of the following criteria:
 It is expected to be settled in the entity’s normal operating cycle.
 It is held primarily for the purpose of being traded.
 It is due to be settled within 12 months after the reporting date.
 The entity does not have an unconditional right to defer settlement of the liability for at least 12
months after the reporting date.
Other than those mentioned above, all other liabilities shall be classified as non-current.
Working capital - the capital of a business that is used in its day-to-day trading operations
- Computed as the difference of current assets and current liabilities.
-
Statement of Cash flows
Statement of cash flows
- The basic financial statement prepared and used in analyzing cash flows.
- It reports the cash receipts, disbursements, and net changes resulting from operating,
investing, and financing activities of the firm during a specific period.

CLASSIFICATION OF CASH FLOWS:

1. Operating activities – cash effects of transactions that create revenues and expenses.
- Generally relate to changes in working capital [Current Assets and Current Liabilities].
Cash inflows: [1] sale of goods/services [2] interest revenue [3] dividend revenue
Cash outflows: [1] salaries, wages paid to employees [2] payment to suppliers [3] interest
expense

2. Investing activities – generally relate to changes in non-current assets.

Cash inflows: [1] Sale of fixed assets [2] collection of principal on loans
Cash outflows: [1] purchase of fixed assets [2] lending of money

3. Financing activities – relate to changes in long-term obligations and equity accounts.

Cash inflows: [1] additional investments made by the owner. [2] issuance of notes or
bonds
Cash outflows: [1] withdrawals made by the owner [2] redemption of long-term debts

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Ways presenting cash flows from operating activities:

1. Direct method – major classes of gross cash receipts and gross cash payments are
disclosed.
o Entities are encouraged to report cash flows from operating activities using this
method.
o Provides information which may be useful in estimating future cash flows and
which is not available under the indirect method.

2. Indirect method – net income or loss is adjusted for the effects of non-cash transactions.

8. Books are closed.

Real accounts – balance sheet accounts (Assets, Liabilities, and Equity)
- They are not reduced to zero at the end of every accounting period.
Nominal accounts – income statement accounts (Income, expenses, and drawing account).
- They are temporary in nature and are reduced to zero at the end of every accounting period.

Things to remember:
1. Open accounts are those which contain a net debit or a net credit balance.
2. If an account has total debits equal to total credits, the totals offset each other and the account has
a zero balance.
3. To close an account with a debit balance, credit the account for an amount equal to the debit
balance.
4. To close an account with a credit balance, debit the account for an amount equal to the credit
balance.

Closing entries – the entries used to close nominal accounts.

- They are prepared at the end of the period to reduce all the balances of the nominal accounts to
zero.

Procedures in closing the nominal accounts:

1. A summary account (Income summary) is used to close all revenue and expense accounts.
2. Close all revenue accounts by debiting the amount and crediting income summary account.
3. Close all expense accounts by crediting the amount and debiting income summary account.
4. Close the balance of the income summary account to the drawing account, which balance
represents profit (credit balance) or loss (debit balance) for the period.
5. Close the updated drawing account to the capital account.

9. Post-closing trial balance is prepared.

 The purpose is to check the equality of debits and credits in the ledger after the adjusting
and closing entries are recorded and posted.
 At this point, the only accounts with balances are assets, contra accounts, liabilities, and
capital.

10.Reversing entries are made

 Prepared at the beginning of a new accounting period before any of the regular transactions
are recorded.

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 The exact opposite of some of the adjusting entries recorded at the close of the accounting
period just ended.
 Not strictly required.

Reversing entries are prepared for:

1. Accrued expenses
2. Accrued income
3. Prepayments under expense method
4. Deferred income under income method
The rest will not need any reversing entry.

~
Related handouts:
- ACC 1-3
- ACC 1-4
- ACC 1-5
Add me to have a copy of these hand-outs .
FB: bry_brian_150@y.c.

Problems:

The financial statements of Stonebanks Company included the following information for the year 2013:
January 1 December 31
Accounts receivable 1,200,000
Allowance for uncollectible accounts 60,000
Service income (all on credit) 8,000,000
Cash collected from customers 7,000,000

The cash collections included a recovery of P 10,000 from Customer control # 18867 whose account had
been written off as worthless in 2012. During 2013, it was necessary to recognize uncollectible accounts
expense of P 100,000 and write off worthless customers’ accounts of P 30,000. On December 1, 2013 a
customer settled an account by issuing a 12%, six-month note for P 400,000. What is the net realizable
value of accounts receivable on December 31, 2013?
A. 1,640,000
B. 1,670,000
C. 1,780,000
D. 1,630,000

Answer: A

On December 31, 2013, Doc Company reported accounts receivable as follows:

Crews Company 800,000

Ford Company 2,000,000
Victor Company 1,500,000
Glen Company 1,000,000
Other accounts receivable not individually significant 5,000,000

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The entity determined that Crews Company receivable is impaired by P 500,000 and Glen Company
receivable is totally impaired. The other accounts receivable from Ford and Victor Company are not
considered impaired. The entity also determined that a composite rate of 4% is appropriate to measure
impairment on all other accounts receivable. What is the total impairment loss of accounts receivable?
A. 1,840,000
B. 1,500,000
C. 1,700,000
D. 1,912,000

Answer: A

Thorn Company imported an equipment at a peso equivalent to P 330,000. The company has to pay
additional cost of importing the asset such as P 10,000 import duties and P 15,000 non-refundable
purchase taxes. Costs of bringing and preparing the asset for its intended use include P 2,000
transportation cost, P 4,000 installation and testing and trial run costs. How much is the initial cost of the
new equipment?
A. 330,000
B. 336,000
C. 346,000
D. 361,000

Answer: D

On January 2, 2012, Smiley Company purchased a transportation equipment costing P 2,400,000. The
new asset has an estimated useful life of 8 years with no salvage value. Smiley depreciates this type of
asset using the straight-line method. On January 1, 2014, Smiley determined that the machine had a useful
life of 6 years from the date of acquisition with no salvage value. As a result of the change in the
estimated useful life of the asset, what is the carrying value of the transportation equipment as of
December 31, 2014?
A. 1,200,000
B. 1,350,000
C. 1,500,000
D. 1,800,000

Answer: B

On January 1, 2014, the Accumulated Depreciation – Machinery account of a particular company showed
a balance of P 370,000. At the end of 2014, after the adjusting entries were posted, it showed a balance of
P 395,000 during 2014, one of the machines which cost P 125,000 was sold for P 60,500 cash. This
resulted in a loss of P 4,000. Assuming that no other assets were disposed of during the year, how much
was depreciation expense for 2014?
A. 25,000
B. 60,000
C. 85,500
D. 93,500

Answer: C

Terry Crews Company purchased a depreciable asset for P 420,000 on January 1, 2012. The estimated
salvage value is P 42,000, and the estimated total useful life is 9 years. The straight-line method is used

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for depreciation. In 2015, Terry Crews changed its estimates to a useful life of 5 years with a salvage
value of P 70,000. How much is the 2015 depreciation expense?
A. 42,000
B. 70,000
C. 112,000
D. 126,000

Answer: D

Under the accrual basis, rental income of Antonio Banderas Company for the calendar year 2014 is P
600,000. Additional information regarding rental income are presented below:

Unearned rental income, January 1, 2014 P 50,000

Unearned rental income, December 31, 2014 75,000
Accrued rental income, January 1, 2014 30,000
Accrued rental income, December 31, 2014 40,000
Under the cash basis, how much rental income should be reported by Antonio Banderas Company in year
2014?
A. 585,000
B. 615,000
C. 625,000
D. 655,000

Answer: B

The December 31, 2014 and 2013 comparative financial statements of Bonaparte Company showed
equipment with an original cost P 379,000 and P 344,000 with accumulated depreciation of P 153,000
and P 128,000, respectively. During 2014, the company purchased equipment costing P 50,000, and sold
equipment with a carrying value of P 9,000. What amount should the company report as depreciation
expense for the year ended December 31, 2014?
A. 19,000
B. 25,000
C. 31,000
D. 34,000

Answer: C

Gunner Jensen’s administrative assistant maintains a very simple computerized general ledger system.
This system includes intuitive routines for recording receipts, payments, and incomes on account.
However, the system is not sufficiently robust to automate end-of-period adjustments. Below is the trial
balance for the month ending January 31, 20x1. This trial balance has not been adjusted for the various
items that are described below the trial balance.

Gunner Jensen Company

Trial Balance
January 31, 20x1

Debits Credits
Cash P 112,500
Accounts receivable 37,230
Prepaid insurance 7,200

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Supplies 21,339
Equipment 105,000
Accumulated Depreciation 30,000
Accounts payable 22,707
Unearned revenues 25,500
Loan payable 45,000
Gunner, Capital 118,371
Revenues 131,985
Salary expense 36,294
Rent expense 39,000
Office expense 7,500
Miscellaneous expense 7,500
P 373,563 P 373,563

 Gunner Company’s equipment had an original life of 140 months, and the straight line
depreciation method is used. The equipment will be worthless at the end of its useful life.
 As of the end of the month. Gunner has provided services to customers for which the earnings
process is complete. Formal billings are normally sent out on the first day of each month for the
prior month’s work. January’s unbilled work is P 75,000.
 Utilities used during January, for which bills will soon be forthcoming from providers, are
estimated at P 4,500
 A review of supplies on hand at the end of the month revealed items costing P 10,500.
 The P 7,200 balance in prepaid insurance was for a 6-month policy running from January 1 to
June 30.
 The unearned revenue was collected in December of 20x0. 60% was actually earned in January,
with the remainder to be earned in February.
 The loan accrues interest at 12% per annum. No interest was paid in January. The loan is due on
October 31, 20x1

Compute the:
1. Adjusted trial balance.
2. Net income (loss) for the month of January.
3. Current assets.
4. Non-current assets.
5. Current liabilities.
6. Non-current liabilities.
7. Gunner, Capital as of January 31.
8. Working capital
9. Post-closing trial balance total.

Answers:
1. 454,263
2. 114,252
3. 241,230
4. 74,250
5. 82,857
6. 0
7. 232,623
8. 158,373
9. 346,230

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The solution for this problem is in an excel file “Gunner Jensen”

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