Module III

The Income Statement

Scope of the Module

Module III of the subject contains the following lessons:
Lesson 1. Basic Elements of an Income Statement for a Service Firm: Its
Nature, Form and Contents
Lesson 2. Revenue and Expense and their Effects on the Accounting
Equation; Recording Income Statements Together with Balance
Sheet Transactions

Overview of the Module

The purpose of the Income Statement is to show the profitability or non-profitability
of the business which has earned or has incurred a loss over a given period of time and
to explain in detail how a net income was earned or a net loss was incurred.
The time interval in the preparation of financial statements varies among
businesses. The maximum length of the accounting period is one year and the shortest
period is one month which includes one complete accounting cycle for the business.
An increase in owner’s equity due to business operations is called income or
revenue. A decrease in owner’s equity resulting from business operations is called an
expense. It represents the cost of goods and services used in business. The excess of
income or revenue over expense is called Net Income or Net Profit. The excess of
Expense over Income or Revenue is called Net Loss.
An income statement prepared for a period of time helps explain the changes in
position that occurred between the beginning and end of period. It is a bridge between
two balance sheet dates.

Objectives of the Module

After studying this module on income statement, you will be able to:
1. recognize the revenue and expense of an accounting period as summarized
in the income statement;
2. distinguish the relationship between the income statement and the balance
sheet;
3. identify the transactions that cause changes in owner’s equity and relate
these changes in terms of the rules of debits and credits.

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Accounting 1
Module III
Lesson 1. BASIC ELEMENTS OF AN INCOME STATEMENT FOR A SERVICE
FIRM; ITS NATURE, FORM AND CONTENT

Lesson Objectives:
After studying this lesson, you will be able to:
1. list revenue and expenses in the income statement;
2. explain how an income statement reflects revenue and expense; and
3. define accounting period.

The income statement summarizes the activities of the business during the period
covered. It shows the income and expense of the business during the period and the
net income or net loss from its operations. An accounting period or fiscal period is any
specific period of time for which a summary of business operation is prepared. The
length of an accounting period is determined by the particular needs of a firm. It can be
a month, quarterly, semi-annually or annually.
The income statement of a service firm consists of only two items:
 Revenue represents an increase in owner’s equity brought about by the
receipt of assets for rendering services to customers.
 Expenses represents a decrease in owner’s equity brought about by using
the assets to generate the revenues for the firm.
The account title used for the revenues earned by a service concern is dependent
upon the type of business the company is engaged in. If the business is engaged in
rendering professional services, then we call the revenue earned Professional Fees; for
repair shop business, the revenue earned is Repair Fees or Income; for a general term,
we use Fees Earned or Service Revenue/Income. In addition to its operating activities,
a business firm may have other income which is not considered as its main source of
activities and therefore not included in the Revenue from Operations section of the
income statement. Example: interest income, rent revenue, dividend revenue, etc.
Likewise, they also incur non-operating expense such as interest expense which is
more of a financial expense.
The very first item that will appear in the income statement is the revenue which is
considered as the main source of business activity. If there will be non-operating
revenues, these items will be presented at the lower portion of the income statement.
The next is the Operating Expense. All expenses incurred in the regular business
operations are shown or listed here. These include all expenses incurred in the
generation of revenue. Some of these are advertising, taxes and licenses, utilities (for

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water, telephone and power), salaries, rental expense and miscellaneous expense. The
order in which the expenses are listed in the income statement varies among
businesses. One method is to list them in the order of size beginning with the larger
items. Miscellaneous expense is usually shown as the last item regardless of the
amount. Expenses which are not involved in the generation of income is written at the
lower portion of the income statement, under the caption, ”Other Expenses.” Example is
interest expense.
There are two forms of an income statement. These are the single-step and the
multi-step. The former groups all expenses and their total is deducted from the total of
all revenues which are also grouped together. The multi-step presents sections,
subsections and intermediate balances. These are:
1. Revenue from sales
2. Cost of good sold
3. Gross profit
4. Operating Expenses
5. Income from Operations
6. Other expenses
7. Net Income
Following is an illustration of a single-step income statement of a service firm:
Great Life Naturals Company
Income Statement
For the Year Ended December 31, 2011
Service Revenue P 120,000
Other income:
Interest Income 1,500
Total Income P 121,500
Less: Operating Expenses
Advertising Expense P 20,000
Salaries Expense 18,000
Repairs and Maintenance Expense 10,000
Taxes and Licenses Expense 5,000
Delivery Expense 3,000
Utilities Expense 1,000
Interest Expense 500
Miscellaneous Expense 2,000
Total Expenses P 59,500
Net Profit P 62,000

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 Observe the following in the preparation of Income Statements:
1. The heading of the Income Statement specifies the name of the company, the
type of statement, and the time period covered by the statement. If you will
not indicate the time period covered, then it would render the statement a
useless one. It is also preferable to present the expense according to size of
the amount, except “Miscellaneous Expense” which should appear as the last
item. Note the difference in dating a balance sheet and an income statement.
The balance sheet is dated as of a particular date, therefore, all the amounts
appearing in the balance sheet is the result of all the transactions that have
transpired from the time the business started up to the balance sheet date.
For example, the business started on May 1, 2003 and you are required to
prepare a balance sheet as of August 31, 2011. Figures that will appear in the
balance sheet will include the cumulative amounts of transactions from May
1, 2003 up to August 31, 2011.
The income statement you will prepare during the year is for eight months
ending August 31, 2011. This will cover only transactions during the period,
January 1, 2011 to August 31, 2011.
2. The difference between operating expense and revenue is called Net
Operating Profit only if there will be other income and other expenses. If there
will be no other income or expense, then the difference is called Net Income
or Net Profit.
If the total operating expense is greater than the revenues, then the difference
is known as Net Operating Loss or Net Loss as the case may be.
3. The result of business operation as shown in the income statement (Net
Income or Net Loss) is then transferred or entered in the owner’s equity
section of the balance sheet in order to balance the statement. A balance
sheet may be presented in an account form or report form. The former
presents the assets on the left side of the statement, while the liabilities and
capital are shown on the right. The report form presents the assets on top of
the liabilities.
Illustrated below is the balance sheet of Great Life Naturals Company as of
December 31, 2011 in a report form:
Great Life Naturals Company
Balance Sheet
December 31, 2011

Assets
Current Assets:
Cash P 10,000
Marketable Securities 20,000
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 Accounts Receivable 15,000
Prepaid taxes & Licenses 5,000
Total current assets P 50,000
Plant, property and equipment:
Land 300,000
Building 400,000
Total plant, property and equipment 700,000
Total assets P 750,000

Liabilities
Current liabilities:
Accounts Payable P 143,000
Notes Payable 150,000
Total current liabilities 293,000

Long-term liabilities:
Mortgage Payable Due 2013 350,000

Total liabilities P 643,000

Owner’s Equity
AZUL, Capital 1/2/11 57,000
Add: Net Increase in Capital
Net Income 62,000
Less: Withdrawals 12,000 50,000
AZUL, Capital 12/31/11 107,000

Total liabilities and capital P 750,000

Notes:
 AZUL capital 1/2/11 represents total investments at the beginning of the
period plus profit retained in the business during the previous year.
 Net Income – The result of business operations per the Income Statement.
 Withdrawals or Personal Drawing – The amount of cash or other assets
taken by the owner from the business for personal use.
Another way of presenting the capital section of the balance sheet is to merely
present the capital balance of the owner as of 12/31/11 by way of the accounting
equation, i.e. Assets-Liabilities = Owner’s Equity. However, it is necessary to present
the changes in owner’s equity through the preparation of a supplementary statement
known as Statement of Changes Equity.
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 Let us take the above example. Assume that instead of showing the breakdown of
capital in the balance sheet, you decided to prepare a capital statement. Therefore, the
capital section of your balance sheet will be shown as follows:
Owner’s Equity
AZUL, Capital 12/31/11
P 107,000

And your capital statement will be presented in this manner:

Great Life Naturals Company

Statement of Changes in Equity
For the Year Ended December 31, 2011

AZUL, Capital, January 2, 2011 P 57,000

Add: Net Income 62,000
Sub-total 119,000
Less: Drawing 12,000
AZUL, Capital December 31, 2011 P 107,000

If the company incurred a net loss (assume a net loss of P 7,000), the capital
statement will be presented as follows:
Great Life Naturals Company
For the Year Ended December 31, 2011

AZUL, Capital January 2, 2011 P 57,000

Less: Net Loss P 7,000
Drawing 12,000 19,000
AZUL, Capital, December 31, 2011 P 38,000

Illustrated below is a multi-step income statement:

Calma Sari-Sari Store
Income Statement
For the Year Ended December 31, 2011

Revenue from sales:

Sales P 986,321
Less: Sales returns & Allowances P 7,183
Sales discounts 6,010 13,193
Net Sales P 973,128

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 Cost of goods sold:
Merchandise inventory Jan. 1/08 63,484
Purchases P 667,014
Less: Purchases Discounts 3,925
Net purchases 663,089
Merchandise available for sale 726,573
Less: Merchandise inventory, Dec. 31, 2011 67,119
Cost of goods sold 659,454
Gross profit 313,674

Operating Expenses:
Salaries Expense 76,129
Advertising Expense 36,905
Depreciation Expense 7,800
Store Supplies Expense 5,117
Office Supplies Expense 1,226
Insurance Expense 1,030
Miscellaneous 2,037
Total Expenses 130,244
Income from operations 183,430
Other income: Interest income 4,050
Other expenses: Interest expense 3,976 74
Net income 183,504

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 Illustrated below is an account form balance sheet:
Jano Sari-Sari Store
Balance Sheet
As of December 31, 2011

Assets Liabilities
Current Assets: Current liabilities
Cash P 76,930 Accounts payable P 34,114
Notes receivable 13,000 Notes payable 150,000
Accounts receivable 18,680 Salaries payable 3,500
Merchandise inventory 67,119 Total current liabilities P 187,614
Store supplies 1,009 Owner’s Equity
Office supplies 450 G. Calma, Capital
Prepaid insurance 1,350 Jan. 1, 2011 209,125
Total current assets 178,538 Add: net income 183,504
Plant assets: (net) Total 392,629
Land 130,000 Less: Drawings 45,000
Building P 185,000 G. Calma, Capital
Less: Accumulated depreciation 22,200 162,800 Dec. 31, 2011 347,629
Office equipment 48,900
Less: Accumulated depreciation 29,340 19,560
Store equipment 63,350
Less: Accumulated depreciation 19,005 44,345
Total plant assets, net 356,705
Total assets P 535,243 Total liabilities and capital P 535,243

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Accounting 1
Module III, Lesson 1
SELF-PROGRESS CHECK TEST

I. Identification.
Classify the following accounts as to whether they are balance sheet items or
income statement items.
If they are balance sheet items, identify the specific section to which they belong
(Current Assets; Plant, Property and Equipment; Current Liabilities; Long-term
Liabilities; Capital).
If they are income statement items, identify the specific section to which they belong
(Revenue Section; Operating Expense Section; Other Income Section; Other Expense
Section). No. 1 is given as an example.
Note: The company is a movie firm.
1. Supplies: Balance Sheet, Current Assets
2. Salaries Expense 9. Interest Expense
3. Equipment 10. Delos Santos, Drawing
4. Film Rental Expense 11. Accounts Payable
5. Miscellaneous Expense 12. Prepaid Taxes and License
6. Admission Fees Earned 13. Sales Tax Payable
7. Delos Santos, Capital 14. Utilities Expense
8. Notes Payable 15. Film Tapes

II. Computation.
Below are the account balances of Rita Repair Shop owned by Jonathan Cruz as of
December 31, 2011. You are required to prepare the following:
1. Income Statement
2. Capital Statement
3. Balance Sheet-Report Form

Accounts Payable P 25,000

Accounts Receivable 8,000
Advertising Expense 8,000
Building 140,000
Cash 10,000
Repair Equipment 90,000
Repairs Income 224,000

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 Furniture and Fixtures 32,000
Taxes and Licenses Expense 3,000
Land 125,000
Maintenance Expense 8,000
Jonathan Cruz, Capital 1/2/11 255,000
Salary Expense 70,000
Utilities Expense 12,000
Jonathan Cruz, Drawing 5,000
Notes Payable 9,000

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Accounting 1
Module III
Lesson 2. REVENUE AND EXPENSE AND THEIR EFFECTS ON THE
ACCOUNTING EQUATION AND RECORDING OF TRANSACTIONS

Lesson Objectives:
After studying this lesson on revenue and expense accounts, you will be able to:
1. recognize the need for revenue and expense accounts;
2. identify how revenue and expense accounts fit into the accounting structure;
and
3. journalize or record the revenue and expenses and balance sheet accounts.

Modules I and II have introduced to you the basic financial structure of accounting.
You have learned the “why” and the “how” of asset, liability, and owner’s equity
accounts. Studying these three accounting elements is insufficient to provide useful
information about business operations. It is apparent that you should also know two
types of accounts to keep tack of the business income and expenses and these are the
revenue and expense accounts. Revenue and expense accounts are used to record
changes in the financial status of a business over a period of time – a week, a month, a
quarter, semi-annual or a year. They have a direct bearing on the assets, liabilities, and
owner’s equity. Expenses result in a decrease in assets and owner’s equity or increase
in liabilities and decrease in owner’s equity.

EFFECTS ON THE ACCOUNTING EQUATION

We have already discussed the effects of business transactions on the assets,

liabilities and owner’s equity. But our main concentration has been focused on the
changes in assets and liabilities. Now we are going to have a detailed information
affecting the owner’s equity.
It is important to know that there are two sources of increasing owner’s equity or
capital. These are additional investments by the owner and profitable operations (net
profit). There are also two sources of decreasing capital. These are personal withdrawal
and unprofitable operation (net loss).
To illustrate the effects of revenue and expense on the accounting equation, the
following is given as an example:
1. The owners invested cash of P 18,000 into his business. The effect of the
transaction on the accounting equation is that the company increases its
assets in the form of cash by P 18,000 and its owner’s equity by P 18,000.
ASSETS = LIABILITIES + CAPITAL
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 Cash + Accounts Receivable = Liabilities + Capital
18,000 + 0 = 0 + 18,000 Investment
2. Rendered services to customers on charged account, P 5,000. The firm
received an asset in the form of accounts receivable P 5,000 and the owner’s
equity increased in the form of revenue P 5,000.
ASSETS = LIABILITIES + CAPITAL
Cash + Accounts Receivable = Liabilities + Capital
0 + 5,000 = 0 + 5,000 Revenue
3. Paid month’s rent for P 4,000. Asset decreases in the form of cash by P 4,000
and the owner’s equity decreases in the form of rent expense by P 4,000.
ASSETS = LIABILITIES + CAPITAL
Cash + Accounts Receivable = Liabilities + Capital
(4,000) + 0 = 0 + (4,000) Rent Expense
4. Paid light and water, P 3,500. Asset decreases in the form of cash P 3,500
and owner’s equity decreases in the form of utilities expense P 3,500.
ASSETS = LIABILITIES + CAPITAL
Cash + Accounts Receivable = Liabilities + Capital
(3,500) + 0 = 0 + (3,500) Utilities Expense
5. Rendered services on account, P 15,000. Asset increases in the form of
accounts receivable by P 15,000 and owner’s equity increase by P 15,000 in
the form of revenue earned.
ASSETS = LIABILITIES + CAPITAL
Cash + Accounts Receivable = Liabilities + Capital
0 + 15,000 = 0 + 15,000 Revenue
6. Owner withdrew P 3,000 for personal use. Asset decreases by P 3,000 in the
form of cash and owner’s equity decreases also by P 3,000.
ASSETS = LIABILITIES + CAPITAL
Cash + Accounts Receivable = Liabilities + Capital
(3,000) + 0 = 0 + (3,000) Drawing
7. Collected P 2,000 of accounts receivable. Total assets are unchanged. It
merely involves a transfer of one asset (accounts receivable) to another asset
(cash). The asset-cash is increased by 2,000 and the asset-accounts
receivable is decreased by P 2,000.
ASSETS = LIABILITIES + CAPITAL
Cash + Accounts Receivable = Liabilities + Capital
2,000 + (2,000) = 0 + 0

The above transactions in tabular form:

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 Transaction
ASSETS = Liabilities + Capital
No.
Accounts
Cash = 0 Capital
Receivable
1 18,000 + 0 = 0 + 18,000 Investment
2 0 + 5,000 = 0 + 5,000 Revenue – Rent
3 (4,000) + 0 = 0 + (4,000) Expense – Rent
4 (3,500) + 0 = 0 + (3,500) Expense – Utilities
5 0 + 15,000 = 0 + 15,000 Revenue – Services
6 (3,000) + 0 = 0 + (3,000) Drawing
7 2,000 + (2,000) = 0 + 0
Sub-Totals 9,500 + 18,000 = 0 + 27,500
Total 27,500 = 27,500

In a transaction worksheet as above, it is a standard to present cash on the first

column instead of Accounts Receivable.
Enclosed in a box are the revenues and expenses that will give rise to a profitable or
unprofitable operation. The investment account is not included because it does not
represent a revenue or an expense.
On the basis of the tabular form, we can determine the results of business operation.
The total revenue earned amounted to P 20,000 (P 5,000 + P 15,000) and the total
expense amounted to P 7,500 (P 4,000 + P 3,500). The difference between the revenue
of P 20,000 and the expense of P 7,500 is a net profit of P 12,500 since total revenue is
greater than the total the total expenses. This amount will then be transferred to the
balance sheet in its capital section as follows:
Beginning Capital (Investment) P 18,000
Add: Net Increase in Capital P 7,500
Less: Drawing 3,000 4,500
Ending Capital P 22,500

To complete the picture of our rules of debit and credit, we will now include revenues
and expenses.
We debit in order to record: We credit in order to record:
1. Increase in assets 1. Decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease in capital 3. Increase in capital
a. Increase in expenses a. Increase in revenue
b. Increase in drawing b. Additional investments

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 EFFECTS ON BOTH THE BALANCE SHEET AND THE INCOME STATEMENT

Applying the rules of debit and credit, we are now ready to review how to journalize
(record) a series of transactions in a two-column journal. Following is an illustration:
Ms. Diwata started a shoe repair business on June 1, 2011. Listed below are her
transactions for the month of June. Let us journalize the transactions.
2011
June 1 Invested P 140,000 in her business Diwata Shoe Repair
4 Purchased a machine from ABM Machinery Company on account for P 15,000.
6 Purchased store fixtures for cash, P 6,000.
8 Paid accounts to ABM Machinery Company.
10 Sold at cost, a portion of her store fixtures to Sandoval Co. on account P, 1,500.
11 Rendered shoe repair services to customers for cash, P 12,000.
12 Paid June rent for P 5,000.
13 Billed Mr. Liwanag for shoe repair services, P 1,800.
13 Purchased supplies from XY Leather Co. on credit, P 30,000.
15 Collected the account of Sandoval Co.
18 Repaired shoes of Regal, Inc. movie stars on charge account, P 25,000.
19 Partial collection of accounts from Regal Inc. services rendered, P 10,000.
23 Paid salaries of employees, P 4,500.
28 Paid Meralco and MWSS bills, P 5,000.
30 Ms. Diwata withdrew P 3,000 worth of supplies for personal use.
30 Made partial payment to XY Leather Co. for P 7,000.

The journal entries for the transactions of Diwata Shoe Repair follows:
Page 1
DESCRIPTION PR Dr. Cr.
2011
June 1 Cash 140,000
Diwata Capital 140,000
Initial Investment
4 Machinery 15,000
Accounts Payable 15,000
Purchased Machine from ABMMachinery on account
6 Store Furniture and fixtures 6,000
Cash 6,000
Purchased of store fixtures for cash
8 Accounts Payable 15,000

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 Cash 15,000
Paid ABM Machinery Co.
10 Accounts Receivable 1,500
Store Furniture and Fixtures 1,500
Sold a portion of store fixtures to Sandoval Co.
11 Cash 12,000
Repairs Revenue 12,000
Rendered services for Cash
12 Rent Expense 5,000
Cash 5,000
Payment for rent
13 Accounts Receivable 1,800
Repairs Revenue 1,800
Billed Mr. Liwanag for services rendered
13 Supplies 30,000
Accounts Payable 30,000
Purchased Supplies from XY Leather Co.
15 Cash 1,500
Accounts Receivable 1,500
Collection of Sandoval Co.’s account
18 Accounts Receivable 25,000
Repairs Revenue 25,000
Rendered services to Regal, Inc.’s stars
19 Cash 10,000
Accounts Receivable 10,000
Collection from Regal, Inc.’s stars
23 Salaries Expense 4,500
Cash 4,500
Payment for Salaries
28 Utilities Expense 5,000
Cash 5,000
Payment for Meralco and MWSS bills
30 Diwata, Drawing 3,000
Supplies 3,000
Withdrawal by the owner
30 Accounts Payable 7,000
Cash 7,000
Partial payment of accounts to XY Leather Co.

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Accounting 1
Module III, Lesson 2
SELF- PROGRESS CHECK TEST

I. Identification.
Indicate how each of the following transactions affect the owner’s equity. Your
answer is either INCREASE (+), DECREASE (-) or NO EFFECT (0).
_____ 1. Purchased a computer for the office on credit.
_____ 2. Withdrew cash for personal use.
_____ 3. Paid weekly payroll.
_____ 4. Prepared a contract for a client and immediately collected cash for the
service.
_____ 5. Paid advertisement
_____ 6. Sold one of the typewriters above cost.
_____ 7. Investment of automobile by the owner for the business.
_____ 8. Rendered services for customers on charged account.
_____ 9. Collected customer’s account.
_____ 10. Paid liability.

II. Analysis.
During 2011, the owner’s equity of Dalisay increases from P 270,000 to P 324,000
despite her P 58,000 cash withdrawal. There being no additional investment, what could
have been the reason for such an increase?

III. Application.
Journalize the following transactions of Pag-Asa Delivery Co. engaged in delivery
service business.
2011
March 3 Mr. Pag-Asa invested P 300,000 of his personal funds in his Pag-
Asa Delivery Co.
3 Acquired the following assets: Delivery Equipment, P 60,000; Land,
P 200,000; Building, P 180,000; Office equipment, P 20,000; and
Office Supplies, P 10,000 giving a 30 % down payment and issued
promissory note P 200,000 payable in three years and the balance
on account.
5 Paid P 18,000 for a one-year advertising contract with B. J.
Thomson Co.
7 Billed customers for P 20,000 for delivery services rendered.
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 10 Collected P 15,000 from customers billed for services.
15 Paid P 5,800 for gasoline, lubrication and minor repairs of delivery
equipment.
20 Received P 9,000 for delivery services rendered.
23 Paid P 24,000 to creditors on account.
25 Received P 6,000 cash and P 14,000 promissory note from
customers for delivery services rendered.
27 Purchased additional supplies for P 5,000 on account.
30 Paid P 56,000 in salaries and wages to drivers, dispatchers and
other personnel.

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Accounting 1
Module III
ANSWER KEYS TO THE SELF-PROGRESS CHECK TESTS

LESSON 1

I.
1. Balance sheet; Current Asset 8. Balance Sheet; Current Liabilities
2. Income Statement; Operating Expense 9. Income Statement; Other Expenses
3. Balance Sheet; Plant, Property, and 10. Balance Sheet; Capital
Equipment 11. Balance Sheet; Current Liabilities
4. Income Statement; Operating Expense 12. Balance Sheet; Current Asset
5. Income Statement; Operating Expense 13. Balance Sheet; Current Liabilities
6. Income Statement; Revenue 14. Income Statement; Operating Expense
7. Balance Sheet; Capital 15. Balance Sheet; Current Assets
II.
1.
Rita Repair Shop
Income Statement
For the Year Ended December 31, 2011

Repairs Income P 224,000

Less: Operating Expenses
Salary Expense P 70,000
Utilities Expense 12,000
Advertising Expense 8,000
Maintenance Expense 8,000
Taxes and Licenses Expense 3,000
Miscellaneous Expense 2,000
Total Operating Expenses 103,000
Net Income P 121,000
2.
Rita Repair Shop
Statement of Owner’s Equity
For the Year Ended December 31, 2011

Jonathan Cruz, Capital 1/2/11 P 255,000

Add: Net Income 121,000
Sub-total 376,000
Less: Drawing 5,000
Jonathan Cruz, Capital 12/31/11 P 371,000
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 3.
Rita Repair Shop
Balance Sheet
December 31, 2011

Assets
Current Assets:
Cash P 10,000
Accounts Receivable 8,000
Total current assets P 18,000
Plant, property and equipment
Land 125,000
Building 140,000
Repair Equipment 90,000
Furniture and Fixtures 32,000
Total plant, property and equipment 387,000
Total Assets P 405,000

Liabilities
Current liabilities:
Accounts Payable P 25,000
Notes Payable 9,000
Total current liabilities P 34,000

Capital
Jonathan Cruz, Capital 12/31/11 371,000

Total Liabilities and Capital P 405,000

LESSON 2

I.
1. 0 2. - 3. - 4. + 5. - 6. + 7. + 8. + 9. 0 10. 0
II.
The reason for such an increase is that Dalisay earned a net profit of P 112,000 arrived at
by deducting Beginning Capital of P 270,000 from Ending Capital of P 324,000. The difference
represents a net increase in capital of P 54,000 which when added to the withdrawal of P
58,000 is a net profit of P 112,000.

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III.
Date Description Dr. Cr.
2011
March 3 Cash P 300,000
Mr. Pag-Asa. Capital P 300,000
Initial Investment
3 Delivery Equipment 60,000
Land 200,000
Building 180,000
Office Equipment 20,000
Office Supplies 10,000
Cash 141,000
Notes Payable 200,000
Accounts Payable 129,000
Purchased various assets
5 Prepaid Advertising 18,000
Cash 18,000
Paid for advertising
7 Accounts Receivable 20,000
Delivery Income 20,000
Rendered delivery service
10 Cash 15,000
Accounts Receivable 15,000
Collected from customer’s accounts
15 Repairs and Maintenance 5,800
Cash 5,800
Paid repairs & maintenance
20 Cash 9,000
Delivery Income 9,000
Rendered service for cash
23 Accounts Payable 24,000
Cash 24,000
Partial payment of account
25 Cash 6,000
Notes Receivable 14,000
Delivery Income 20,000
Rendered services to customers
27 Supplies 5,000
Accounts payable 5,000
Purchased additional supplies on account
30 Salaries and Wages Expense 56,000
Cash 56,000
Paid salaries of employees

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