Acct

Chap 5

THE ACCOUNTING CYCLE

1. ANALYZING TRANSACTIONS- check the nature of the transactions

2. JOURNALIZATION- the process of recording the business transaction in the
journal
3. POSTING TO THE LEDGER- the process of transferring the information from
the journal to the ledger.
4. PREPARING THE TRIAL BALANCE- the process of taking the balances of
open accounts from the ledger,
5. ADJUSTING THE BOOKS- entries prepared at the end of the accounting
period to update the records.
6. PREPARING THE FINANCIAL STATEMENTS- refers to the preparation of
accounting reports, the Income Statement, Balance Sheet, Statement of
Owner’s Equity and Statement of Cash Flows.
7. CLOSING THE BOOKS- refers to the preparation of closing entries at the end
of the accounting period to bring the income and expense accounts to zero
balance.
8. PREPARING A POST-CLOSING TRIAL BALANCE- refers to the preparation
of a Trial Balance after closing the income and expense accounts. The post
closing trial balance shows only the assets, liabilities and owner’s equity.
9. REVERSING ENTRIES- are prepared at the beginning of the next accounting
period to reverse certain adjustments that were made at the end of the
accounting period.

JOURNALIZATION
 THE RECORDING OF BUSINESS TRANSACTIONS IN TERMS OF DEBIT AND
CREDIT IN A JOURNAL. THE SIMPLEST FORM OF JOURNAL IS CALLED THE
GENERAL JOURNAL.
 A JOURNAL IS A CHRONOLOGICAL RECORD OF THE ENTITY’S
TRANSACTIONS.IT IS THE BOOK OF ORIGINAL ENTRY.

HOW TO JOURNALIZE A TRANSACTION

1. ENTER THE DATE AND THE YEAR IN THE DATE COLUMN
2. THE DEBIT ENTRY IS PLACED IN THE “ EXPLANATION” COLUMN.
3. THE CREDIT ENTRY IS PLACED ON THE NEXT LINE AFTER THE DEBIT ENTRY,
INDENTED ABOUT ONE HALF INCH.
4. A BRIEF EXPLANATION IS WRITTEN ON THE THIRD LINE WHICH IS ALSO
INDENTED.
5. LEAVE THE NEXT LINE BEFORE ENTERING THE SECOND JOURNAL ENTRY.
6. A COMPLETE JOURNAL ENTRY IS COMPOSED OF A DEBIT AND A CREDIT PLUS
A BRIEF EXPLANATION.
7. THE AMOUNTS ARE ENTERED IN THE IN THE DEBIT AND CREDIT COLUMN IN
THEIR PROPER MONEY COLUMN.
8. THE F IN THE “F” COLUMN STANDS FOR FOLIO OR REFERENCE.

TYPES OF JOURNAL ENTRY

1. SIMPLE JOURNAL ENTRY- when there is one debit and one credit
2. COMPOUND JOURNAL ENTRY - when the journal entry has two or more debit
or two or more credit. It may take any of the following form:

A. One debit and two or more credits

B. Two or more debits and one credit
C. Two or more debits and two or more credits
DISCOUNTS
TWO KINDS OF DISCOUNTS:
1.TRADE DISCOUNT - ARE DEDUCTIONS FROM THE LIST PRICE TO ENCOURAGE
BUYERS TO BUY MORE. THIS IS IMMEDIATELY DEDUCTED FROM THE LIST PRICE.
THIS IS NOT RECORDED IN THE BOOKS.
2. CASH DISCOUNTS - ARE DEDUCTIONS FROM THE INVOICE COST TO
ENCOURAGE CUSTOMERS TO PAY EARLY.THIS IS RECORDED IN THE BOOKS AS
EITHER SALES DISCOUNT OR PURCHASE DISCOUNT. HOWEVER PURCHASE
DISCOUNT ON FIXED ASSETS ARE DIRECTLY DEDUCTED TO THE COST OF THE
ASSET.

DISCOUNT TERMS
A. TRADE DISCOUNT- 10 AND 5 (MEANING 10 % AND 5%. THE FIRST DSCOUNT
OF 10% IS DEDUCTED FROM THE LIST PRICE AND THE SECOND DISCOUNT OF 5%
IS DEDUCTED FROM THE BALANCE AFTER DEDUCTING THE FIRST DISCOUNT.
B. TRADE DISCOUNT- 10% (TO BE DEDUCTED FROM THE LIST PRICE)
C. CASH DISCOUNTS- 2/10, N/30
D. CASH DISCOUNT - ⅖;1/10, N/30
E. 2, eom

METHODS OF ACCOUNTING FOR INCOME & EXPENSES

1. ASSET METHOD AND EXPENSE METHOD FOR EXPENSES

2. INCOME METHOD AND LIABILITY METHOD FOR INCOME

EXPENSE METHOD- IS USED WHEN AN EXPENSE ACCOUNT IS DEBITED AT THE

TIME OF PAYMENT
ASSET METHOD- IS USED WHEN THE ASSET ACCOUNT IS DEBITED AT THE TIME
OF PAYMENT
WHEN THE PROBLEM IS SILENT, THE EXPENSE METHOD IS ALWAYS USED.

INCOME METHOD- WHEN MONEY IS RECEIVED AN INCOME ACCOUNT IS

CREDITED
LIABILITY METHOD- WHEN MONEY IS RECEIVED, A LIABILITY IS CREDITED.
WHEN THE PROBLEM IS SILENT THE INCOME METHOD IS ALWAYS USED.

INTEREST IS THE AMOUNT PAID FOR THE USE OF MONEY EITHER BE AN INCOME
OR EXPENSE. IT IS EXPENSE TO THE BORROWER AND AN INCOME TO THE
LENDER. INTEREST IS COMPUTED ON AGREED RATE OF INTEREST ON THE SUM
BORROWED OR LENT.

A PROMISSORY NOTE EVIDENCES THE INDEBTEDNESS. IT IS A WRITTEN

PROMISE MADE BY A MAKER PROMISING TO PAY A PERSON CALLED PAYEE A SUM
CERTAIN IN MONEY AT A FIXED OR DETERMINABLE FUTURE TIME. IT CAN BE
INTEREST BEARING NOTE OR NON-INTEREST BEARING NOTE.

PARTS OF A PROMISSORY NOTE

1. DATE OF THE NOTE IS THE DATE WHEN THE NOTE IS DRAWN.
2. FACE OF THE NOTE IS THE AMOUNT BORROWED OR LENT.
3. DATE OF MATURITY IS THE DATE ON WHICH THE NOTE IS TO BE PAID.
4. PAYEE IS THE PERSON TO WHOM PAYMENT IS TO BE MADE.
5. MAKER IS THE PERSON WHO PROMISES TO PAY THE NOTE.
6. MATURITY VALUE IS THE AMOUNT TO BE PAID AT MATURITY DATE.
PARTS OF A PROMISSORY NOTE
1) IN THE EXAMPLE THE BORROWER (MAYLIN GUTIEREZ IS THE MAKER OF THE
NOTE.
2) THE LEDGER (ERLINDA HERNANDEZ) IS THE PAYEE.
3) AUGUST 1, THE DATE OF THE NOTE.
4) P5,000 IS THE FACE OF THE NOTE.
5) AUGUST 31, THE MATURITY DATE.
6) 3O DAYS IS THE TERM OF THE NOTE.

WE RECEIVE NOTES WHEN:

1. WHEN THE BUSINESS SELLS ON ACCOUNT
2. WHEN AN OPEN ACCOUNT CANNOT BE SETTLED ON THE DATE OF PAYMENT.
3. WHEN THE BUSINESS LENDS MONEY.

HOW TO COMPUTE INTEREST

FORMULA:
INTEREST= PRINCIPAL X RATE X TIME
PRINCIPAL- THE ORIGINAL AMOUNT
RATE= RATE OF INTEREST
TIME- EXPRESSED IN YEARS

HOW TO COMPUTE INTEREST

CASE 1 :THE BUSINESS RENDERED SERVICES ON ACCOUNT FOR P1,000

RECEIVING A NOTE

ENTRY:
NOTES RECEIVABLE P 1,000
-- SERVICE INCOME P 1,000
TO RECORD THE RECEIPT OF A NOTE

CASE 2: THE CUSTOMER WAS NOT ABLE TO PAY HIS ACCOUNT ON JULY 1, ISSUED
TODAY AUGUST 31 FOR P3,000.

ENTRY:
JULY 1:
ACCOUNTS RECEIVABLE P 3,000
-- SERVICE INCOME P 3,000

AUGUST 31
NOTES RECEIVABLE P 3,000
-- ACCOUNTS RECEIVABLEP 3,000

CASE 3: THE BUSINESS LENT P5,000. AN INTEREST OF P500 WAS ALREADY

DEDUCTED.

NOTES RECEIVABLE P 5,000

-- CASH ON HAND P4,500
-- INTEREST INCOME 500
THE 60 DAY 6% RULE
Under the rule, we can say that the interest on any principal at 6% fo 60 days is
the quotient of itself divided by 100. From this, we can say that:
1) The interest on any sum of 60 days at 6%, move the decimal point two places
to the left.
2) The interest on any sum for 6 days at 6%, simply move the decimal point
three places to the left.
3) The interest on any sum for 600 days at 6%, simply move the decimal point
one place to the left.

Determining the maturity date

Step 1 - Determine the number of days in June-30 days;
Step 2 - Deduct the date of the note, june 30-1 = 29
Step 3 - Count forward until you get 120 days.

30 days in june
31 days in july
-1 date of the note
29 days needed in september to complete 120 days
29 days left in june
120 days
The maturity date is September 29.

If the two dates, date of the note and date of maturity are given, the same
procedures may be followed.

Illustrative problem involving interest computation

May 1 - Rendered service to Mr. Jose Reyes receiving a 60 day, 6% note, P3,000.
Notes Receivable P3,000
Service Income P3,000

July 1 - Mr. Reyes paid the note.

Cash on hand P3,030
Note Receivable P3,000
Interest Income P30

Using the 60 day, 6% rule, the decimal point was moved two places to the left of
the principal, P3,000.

2 - Bought an office equipment of account, P5,000 issuing a 30 day, 6% note.

Office equipment P5,000
Notes payable P5,000

5 - Bought pieces of furniture from Nicfur Company for P6,000 on account, n/10.
Furnitures & Fixtures P6,000
Accounts Payable P6,000

15 - Issued a 15 day, 12% note for our account on july 5.

Account payable P6,000
Notes payable P6,000

30 - Paid the note plus interest on the july 15 account.

Notes payable P6,000
Interest expense P30
 Cash on hand P6,030

Aug. 15 - The business discounted its 30 day 12% note for P10,000 with ABC
Financing corp.
Cash on hand P9,900
Interest expense P100
Notes payable P10,000

Discounting of notes
Another source of cash is by discounting a note. A business may borrow from
banks or lending institutions by issuing a note. When a note is discounted, the
interest is deducted in advance. The cash received is lower than the face of the
note. When the note is paid at maturity, there is no more interest to be paid but
simply the face of the note.

Illustration - Discounting a note payable

On August 1, 2007, Bradz R. Electrical services borrowed P20,000 from NOVA
lending at 14% interest for 60 days.

Sept. 30 - Paid the note

Journal entries
Aug. 1 - Cash on hand P19,533.33
Interest expense 466.67
Notes payable
P20,000

Computation:
P20,000 x .14 x 60/360 = 466.67
P20,000 - 466.67 = 19,533.33

Sept. 30 -
Notes payable P20,000
Cash on hand P20,000

Discounting a note receivable

The business may lend cash to debtor. The interest is likewise deducted in
advance. Let us reverse the situation now.

On Aug. 1 Bradz R. lent P20,000 to Mr. Reyes at 14% for 60 days.

Journal entries
Aug. 1 - Note receivable P20,000
Cash on hand P19,533.33
Interest income P466.67

Mr. Reyes paid the note on Sept. 30

Sept.30 - Cash on hand P20,000
Note receivable P20,000
Note: The computation of interest in discounting a note will be the same
regardless of the lender or borrower. Only the entries will vary in the books of the
borrower or lender.