Module 1

Introduction to Accounting Module 1
MODULE 1
INTRODUCTION TO ACCOUNTING
LEARNING OBJECTIVES:
After a careful study of this module, you should be able to:
1. Know the definition of accounting and its role in business.

2. Distinguish the different types and forms of business organization as well as their characteristics.
3. Learn the different accounting values or elements.
4. Learn the accounting process (functions of accounting).
5. Know the accounting equation and its significance.
6. know what a business transaction is and its effect on the accounting elements.
7. Learn how to record the business transactions using the double entry method of bookkeeping
8. Learn how to prepare the trial balance and how to detect errors in posting.
9. Learn how to prepare the financial statements of a servicing and trading concern (Income
Statement, Statement of Financial Condition, Statement of Changes in Equity and Statement of
Cash Flows)
ACCOUNTING DEFINED
Accounting is a service activity whose function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making economic decisions. In general
sense, Accounting is an information system that provides reports to stakeholders about economic activities
and condition of a business.
ROLE OF ACCOUNTING IN BUSINESS:
1. Help the owners or management make decisions.

2. Record and analyze business transactions.
3. Communicate financial information to all interested parties.
TYPES OF BUSINESS:
1. Service business – entities that provide services to customers (e.g. schools, insurance
companies, accounting or law firms, repair shops, transportation companies, etc.)
2. Merchandising business – entities that purchase products from other businesses and sell them
to customers, (e.g. retailers, wholesalers, groceries, department stores, hardwares, drugstores,
etc.).
3. Manufacturing business – entities that convert raw materials into finished products which are
sold to customers. (e.g. manufacturer of food, clothing, medicines, toys, furniture, fixtures,
equipment, etc.)
TYPES OF OWNERSHIP STRUCTURE (Forms of Business Organization):
1. Proprietorship – is a business that is owned and operated by a single individual (the

owner is called proprietor).
2. Partnership – is a business that is owned by two or more individuals (the owners are called
partners).
3. Corporation – is a business whose capital is divided into shares of stock and is created by
operation of law. (the owners are called stockholders).
4. Cooperative – is a business that is exempt from taxation. (the owners are called members).
1
Characteristics of the Different Forms of Business Organization:
Proprietorship Partnership Corporation Cooperative
1. One owner 1. Two or more owners 1. Unlimited owners 1. Unlimited owners

2. Unlimited liability 2. Unlimited liability 2. Limited liability of 2. Limited liability of
for unpaid debts for partnership debts the stockholders the members for
3. Owner manages 3. There is a managing for corporate debts the cooperative’s debts.
the business. partner. 3. Management is 3. Management is vested
vested in the board in the BOD.
of directors (BOD).
BASIC ELEMENTS OF ACCOUNTING (Accounting Values):
Statement of Financial Condition Elements (Shows the Financial Condition of the

Business)
1. Assets – economic resources that have values and owned by the business. Included in this
element are cash, receivables, inventory, land, building, machinery, furniture and equipment.
2. Liabilities – economic or legal obligations that a business owes to other businesses or individuals.
Included in this element are accounts payable, notes payable, loan payable, payables to
government and unpaid (accrued) expenses.
3. Owner’s Equity - is the owner’s interest in, or claim to, the assets of a business. It is the
difference between the amount of assets and amount of liabilities.
Statement of Comprehensive Income Elements (Shows the Results of Operations)
1. Revenues – inflows of assets resulting from the sale of goods or services. Revenues increase
owner’s equity.
2. Expenses – outflows of assets resulting from cash spent or liability incurred in order to produce
revenue. Expenses decrease owner’s equity.
3. Net Income (Loss) – the excess (deficit) of revenue over expenses for a given accounting period.
Net income increase owner’s equity while net loss decreases owner’s equity.
THE ACCOUNTING PROCESS (Functions of Accounting)
Accounting is a measurement and communication process designed to provide useful and timely financial
information. Its functions are the following:
1. Recording – this is more popularly known as BOOKKEEPING, which involves putting into records
the business transactions and events. This can be done manually, with the use of mechanical
devices or electronically, or with the use of computer.
2. Classifying– this involves the grouping of similar items together in order to make the recording of
the different transactions and events more systematic
3. Summarizing – this involves the preparation of financial statements.
4. Interpreting– this involves the analysis of financial statements (by developing financial ratios and
explaining their significance) for the benefit of the readers or users.
2
RECORDING OF THE BUSINESS TRANSACTIONS
THE ACCOUNTING EQUATION
The relationship between the three basic accounting elements of the Statement of Financial Condition –
Assets, Liabilities, and Owner’s Equity – can be expressed in the form of a simple equation known as the
Accounting Equation. All accounting information is recorded within the framework of the accounting
equation. The basic accounting equation is shown below:
Assets = Liabilities + Owner’s Equity

P500,000 = P200,000 + P300,000
or
Assets - Liabilities = Owner’s Equity

P500,000 - P200,000 = P300,000
The equality of the accounting equation is always maintained for every transaction that is recorded. The
peso amount on the left side of the equation (called DEBIT) should always equal to the peso amount on
the right side of the equation (called CREDIT). If assets increase, liabilities and/or owner’s equity must
increase by the same amount. Conversely, if assets decrease, there will be a corresponding decrease by
the same amount in the liabilities and/or owner’s equity. An increase in an asset may also have a
corresponding decrease in another asset or an increase in a liability may also have a corresponding
decrease in another liability by an equal amount.
ACCOUNTING EQUATION EXPANDED

Cash + Accounts Receivable Accounts Payable Owner’s, Capita l– Drawing
+ Supplies + Repair Equipment + Bank Loan + Revenues – Expenses
1. The two sides of the equation should always balance.

2. The effect of every transaction is an increase or decrease in one or more of the accounting
equation elements.
3. The owner’s equity is increased by the amount invested by the owner and decreased by
withdrawals. In addition, the owner’s equity is increased by revenues and is decreased by
expenses.
BUSINESS TRANSACTION
Business Transaction – is an economic event or condition that directly changes an entity’s financial
condition or directly affects its results of operations. An accounting transaction takes place when a
business exchanges a thing or things of value for another. Business transactions are recorded in terms of
debit and credit. DEBIT is the value received or paid for by the business while CREDIT is the value parted
with or given up by the business. This is called the dual effect of a transaction. This is illustrated in the next
page. Business transactions will affect the accounting elements but the equality of the accounting equation
will be maintained. The analysis of the effects of a transaction in the accounting elements is illustrated in
page 5 (see expanded accounting equation).
3
BUSINESS TRANSACTIONS
DEBIT (DR)_ CREDIT (CR)
Value/s received Value/s given up

Transactions or paid for or parted with
1. J. Cruz, invested P200,000 to Cash J Cruz, Capital

start an auto repair business. (Ownership right)
2. Cruz bought repair equipment Equipment Accounts payable

from X Co. on credit, P100,000. (Obligation to pay)
3. Cruz bought Shop Supplies Shop Supplies Cash

for cash, P62,000.
4. Paid X Co. partially, P 60,000. Accounts payable Cash

(Reduction of obligation)
5. Cruz received a bank loan for Cash Loan Payable

business use, P100,000. (Promise to pay)
6. Customers paid cash for auto Cash Repair Income

repairs services rendered, P25,000. (Services)
7. Repair services rendered on Accounts receivable Repair Income

account, P50,000. (Right to collect) (Services)
8. Paid a month’s rent, P10,000. Rent expense Cash

(Right to occupy)
9. Cruz made partial collections Cash Accounts receivable

from customers’ accounts, P30,000. (Reduction of Right
to collect)
10. Cruz paid the salaries and Salary expense Cash

wages of laborers, P15,000. (Employees’ services)
11. Billed a customer, P6,000. Cash Repair Income

and received a partial Accounts receivable (Services)
payment of P 2,000. (Right to collect)
12. Shop supplies purchased, P15,000 Shop Supplies Cash

and made a down payment of . Accounts payable
P 5,000. (Obligation to pay)
13. Shop Supplies bought for cash Supplies expense Cash

and used, P 18,000. (Supplies used)
14. Cruz withdrew P20,000 for J. Cruz, Drawing Cash

his personal use. (Ownership right taken)
4
ASSETS LIABILITIES OWNER'S EQUITY

Cash + A/c Recble + Supplies + Equipt. = A/c Pay. + Bank Loan + J.C. Cap. + Revenues -Expense
1. 200,000 200,000
Transaction: J. Cruz, invested P200,000 to start an auto repair business.
2. 100,000 = 100,000 +
Transaction: Cruz bought repair equipment from X Co.on credit, P100,000.
3 -62,000 62,000 = +
Transaction: Cruz bought shop supplies for cash, P62,000.
4. -60,000 = -60,000 +
Transaction: Paid X Co. partially, P60,000.
5. 100,000 = 100,000 +
Transaction: Cruz received a bank loan for business use, P100,000.
6. 25,000 = + 25,000
Transaction: Customers paid cash for auto repairs services rendered, P25,000.
7. 50,000 = + 50,000
Transaction: Repair services rendered on account, P50,000.
8. -10,000 = + 10,000
Transaction: Paid a month’s rent, P10,000.
9. 30,000 -30,000 = +
Transaction: Cruz made partial collections from customers accounts, P30,000.
10. -15,000 = + 15,000

Transaction: Cruz paid the salaries and wages of laborers, P15,000.
11. 2,000 4,000 = + 6,000

Transaction: Billed a customer, P6,000 and received a partial payment of P 2,000.
12. -5,000 15,000 = 10,000 +

Transaction: Shop supplies purchased. P15,000 and made a down payment of P 5,000.
13. -18,000 = + 18,000

Transaction: Shop supplies bought for cash and used, P18,000.
14. -20,000 = + -20,000

Transaction: Cruz withdrew P20,000 for his personal use.
5
ASSETS = LIABILITIES + OWNER'S EQUITY

Cash + A/c Recble + Supplies + Equipt. = A/c Pay. + Bank Loan + J.C. Cap. + Revenues -Expense
1 200,000 = + 200,000
2 100,000 = 100,000 +
Bal. 200,000 100,000 = 100,000 + 200,000
3 -62,000 62,000 = +
Bal. 138,000 62,000 100,000 = 100,000 + 200,000
4 -60,000 = -60,000 +
Bal. 78,000 62,000 100,000 = 40,000 + 200,000
5 100,000 100,000
Bal. 178,000 62,000 100,000 40,000 100,000 200,000
6 25,000 25,000
Bal. 203,000 62,000 100,000 40,000 100,000 200,000 25,000
7 50,000 50,000
Bal. 203,000 50,000 62,000 100,000 40,000 100,000 200,000 75,000
8 -10,000 -10,000
Bal. 193,000 50,000 62,000 100,000 40,000 100,000 200,000 75,000 -10,000
9 30,000 -30,000
Bal. 223,000 20,000 62,000 100,000 40,000 100,000 200,000 75,000 -10,000
10 -15,000 -15,000
Bal. 208,000 20,000 62,000 100,000 40,000 100,000 200,000 75,000 -25,000
11 2,000 4,000 6,000
Bal. 210,000 24,000 62,000 100,000 40,000 100,000 200,000 81,000 -25,000
12 -5,000 15,000 10,000
Bal. 205,000 24,000 77,000 100,000 50,000 100,000 200,000 81,000 -25,000
13 -18,000 -18,000
Bal. 187,000 24,000 77,000 100,000 50,000 100,000 200,000 81,000 -43,000
14 -20,000 -20,000
Bal. 167,000 24,000 77,000 100,000 50,000 100,000 180,000 81,000 -43,000
1. Transaction effect: Increase Assets (Cash) and increases Owner’s Equity (J. Cruz, Capital) by P200,000.
2. Transaction effect: Increase Assets (Equipment) and increases Liabilities (Accounts Payable) P100,000.
3. Transaction effect: Decrease Assets (Cash) and increases another Assets (Shop Supplies) P62,000.
4. Transaction effect: Decrease Assets (Cash) and decreases Liabilities (Accounts Payable) P60, 000.
5. Transaction effect: Increase Assets (Cash) and increases Liabilities (Bank Loan) by P100, 000.
6. Transaction effect: Increase Assets (Cash) and increases Owner’s Equity (Revenues) by P25, 000.
7. Transaction effect: Increase Assets (Accounts receivable) and increases Owner’s Equity (Revenues)
by P50,000.
8. Transaction effect: Decrease Assets (Cash) and decreases Owner’s Equity (Expenses) by P10, 000.
9. Transaction effect: Increase Assets (Cash) and decreases another Assets (Accounts Receivable)
by P30,000.
11. Transaction effect: Increase Assets - (Cash-P2,000 and Accounts Receivable-P4,000) and increases
OE (revenues) by 6,000.
12. Transaction effect: Increase Assets – Supplies-P15,000, decreases Assets – Cash-P5,000 and
increases Liabilities – (A/c Payable) - P10,000.
14. Transaction effect: Decrease Assets (Cash) and decreases Owner’s Equity (J. Cruz, Capital) by
P 20, 000.
6
FINANCIAL STATEMENTS
Accounting Period – the period at the end of which financial statements are prepared. The
accounting period usually covers one year because it jibes with the payment of the annual
income taxes.
Calendar Year – a 12-month period ending December 31.
Fiscal Year – 12-month period not ending December 31.
Natural Business Year – a 12-month period which ends at the time the business activity
is at this lowest.
Financial Statements – are accounting reports prepared at the end of an accounting period (usually one
year) that provide financial information regarding the transactions that have been recorded and
summarized. The principal financial statements which are the end-products of accounting are the:
Statement of Comprehensive Income – also called as the Statement of Comprehensive Income, is a

statement, which shows the revenue and expenses for a specified period of time. It shows the results of
operations..
Statement of Changes in Equity - is a statement, which shows the summary of changes in the owner’s
equity for a given period of time. This statement supplements the Statement of Financial Condition.
Statement of Financial Condition - is a statement which shows the assets, liabilities and owner’s equity
of the business as of a specific date. It shows the financial condition of the business.
Statement of Cash flows – is a summary of cash inflows and cash outflows for a specific period of time,
such as a month or a year.
J. CRUZ AUTO REPAIR SHOP
Statement of Comprehensive Income
For the Month Ended June 30, 200C
INCOME
Repair Income P 81,000.00
EXPENSES
Salary P 15,000.00
Rent 10,000.00
Supplies 18,000.00
Total Expenses 43,000.00
PROFIT FROM OPERATIONS P 38,000.00

Statement of Changes in Equity
J. Cruz Capital, June 1 P -

Add: Investment in June, P 200,000.00
Profit in June 38,000.00 238,000.00
Total 238,000.00
Less: J. Cruz, Drawing 20,000.00
J. Cruz Capital, June 30, P 218,000.00
It is assumed that J. Cruz started business on June 1, 200C.

Note: The data presented on the financial statements are taken from the data summarized from
the Expanded Accounting Equation on Page 6.
7

Statement of Financial Condition
June 30, 200C
ASSETS
Cash P 167,000.00
Accounts Receivable 24,000.00
Shop Supplies 77,000.00
Repair Equipment 100,000.00
TOTAL ASSETS P 368,000.00
LIABILITIES AND OWNER’S EQUITY
Accounts Payable P 50,000.00

Bank Loan 100,000.00 P 150,000.00
J. Cruz, Capital 200,000.00

Add: Net Income 38,000.00
Total 238,000.00
Less: J. Cruz, Drawing 20,000.00 218,000.00
TOTAL LIABILITIES & OWNER’S EQUITY P 368,000.00
J. CRUZ REPAIR SHOP

Statement of Cash Flows
Cash Flows from Operating Activities:

Collections from Customers P 57,000.00
Payments for Expenses (25,000.00)
Payment for Shop Supplies (85,000.00) P (53,000.00)
Cash Flows from Investing Activities:

Payment for Repair Equipment (60,000.00)
Cash Flows from Financing Activities:

Bank Loan 100,000.00
Investment of J. Cruz 200,000.00
Cash withdrawal of J. Cruz (20,000.00) 280,000.00
Net Cash Inflow (June 30 balance) P 167,000.00
8
Example Problem 1.
On July 1 of the current year, Paul Brite started a TV repair business.
1. He invested P50,000 in cash to start his business.

2. Purchased for cash shop supplies costing P3,500.
3. Brite bought from A & G Company repair equipment costing P 20,000 on credit.
4. Customers paid P12,000 cash for repair services rendered.
5. Brite made a partial payment to A & G Company, P15,000.
6. Customers were billed on account P14,000 for repair services rendered.
7. Rental for the month of July was paid, P6,000.
8. Collected P8,000 from customers as payment of their accounts.
9. Paid wages of assistant helper for the month of July, P4,000.
10. Bought additional shop supplies costing P 7,500. A down payment of P 3,000 was made and
the balance is payable at the end of the month.
11. Repair services rendered, P 9,000. Received P4,500 as partial payment.
12. Repair supplies bought for cash and used for repairs amounted to P 6,500.
13. Brite withdrew P 10,000 for his personal use.
Required:
a. Record the peso amount under the appropriate heading below on the accounting equation
to show the effect of each transaction. Show the balance after the second transaction and
there after and their final balances.
Cash + A/cs Rec’ble + Supplies + Equipment Accounts Payable P. Brite, Capital

+ Revenues
- Expenses
b. Prepare the following financial statements:
1. Statement of Comprehensive Income for the month ended July 31, of the current year.
2. Statement of Changes in Equity for the month ended July 31, of the current year.
3. Statement of Financial condition as of July 31, of the current year.
4. Statement of Cash Flows for the month ended July 31, of the current year.
9
Solution to Example Problem 1a:
ASSETS = LIABILITIES + OWNER'S EQUITY

Cash + A/c Recble + Supplies + Equipt. = A/c Pay. + + J.C. Cap. + Revenues -Expense
1 50,000 = + 50,000
2 -3,500 3,500 = +
Bal. 46,500 3,500 = + 50,000
3 20,000 = 20,000 +
Bal. 46,500 3,500 20,000 = 20,000 + 50,000
4 12,000 = + 12,000
Bal. 58,500 3,500 20,000 = 20,000 + 50,000 12,000
5 -15,000 = -15,000 +
Bal. 43,500 3,500 20,000 = 5,000 + 50,000 12,000
6 14,000 = + 14,000
Bal. 43,500 14,000 3,500 20,000 = 5,000 + 50,000 26,000
7 -6,000 = + -6,000
Bal. 37,500 14,000 3,500 20,000 = 5,000 + 50,000 26,000 -6,000
8 8,000 -8,000 = +
Bal. 45,500 6,000 3,500 20,000 = 5,000 + 50,000 26,000 -6,000
9 -4,000 = + -4,000
Bal. 41,500 6,000 3,500 20,000 = 5,000 + 50,000 26,000 -10,000
10 -3,000 7,500 = 4,500 +
Bal. 38,500 6,000 11,000 20,000 = 9,500 + 50,000 26,000 -10,000
11 4,500 4,500 = + 9,000
Bal. 43,000 10,500 11,000 20,000 = 9,500 + 50,000 35,000 -10,000
12 -6,500 = + -6,500
Bal. 36,500 10,500 11,000 20,000 = 9,500 + 50,000 35,000 -16,500
13 -10,000 = + -10,000
+
Bal. 26,500 10,500 11,000 20,000 = 9,500 + 40,000 35,000 -16,500
10
Solution to Example Problem 1b.
PAUL BRITE TV REPAIR SHOP

Statement of Comprehensive Income
For the Month Ended July 31, 200C
REVENUES: P 35,000.00
Repair Income
OPERATING EXPENSES:
Salary Expense P 4,000.00
Rent Expense 6,000.00
Supplies Expense 6,500.00
Total Operating Expenses 16,500.00
PROFIT FROM OPERATIONS P 18,500.00

Statement of Changes in Equity
P. Brite Capital, July 1 P -

Add: Investment in July, P 50,000.00
Profit in July 18,500.00 68,500.00
Total 68,500.00
Less: P. Brite, Drawing 10,000.00
P. Brite, Capital, July 31, P 58,500.00
11

July 31, 200C
ASSETS
Cash P 26,500.00
LIABILITIES AND OWNER’S EQUITY
Paul Brite, Capital P 50,000.00

Add: Profit 18,500.00
Total 68,500.00
Less: Paul Brite, Drawing 10,000.00 58,500.00
TOTAL LIABLITIES & OWNER’S EQUITY P 68,000.00

Statement of Cash Flows
Cash Flows from Operating Activities:

Collection from Customers P 24,500.00
Payments for Expenses (10,000.00)
Payment for Shop Supplies (13,000.00) P 1,500.00
Cash Flows from Investing Activities:

Payment for Repair Equipment (15,000.00)
Cash Flows from Financing Activities:

Investment of Paul Brite P 50,000.00
Cash withdrawal of Paul Brite (10,000.00) 40,000.00
Net Cash Inflow (July 31, balance) P 26,500.00
12
DOUBLE-ENTRY METHOD OF BOOKKEEPING
Every business transaction affects at least two accounts (items). When you record the peso amount of a
transaction in one account, you record that same amount in another account. This is done to keep both
sides of the accounting equation equal or in balance.
The “double-entry system” is used because you are recording the amount involved in a transaction
twice. The fact that each transaction has a dual effect on the accounting elements is the basis for the
double-entry method of bookkeeping.
Double-Entry Method of Bookkeeping – is a method of recording the business transactions in terms of

the dual effect on the accounting elements (i.e., assets, liabilities, owner’s equity, revenues and
expenses). In other words, the transactions are recorded in terms of the increase or decrease in the
accounts that are affected.
An Account – is an accounting device used to classify and store information about the increases and
decreases in a particular item.
THE T ACCOUNT
The T account, is so called because of its T shape. It is used to show the increase or decrease in an
account (item) caused by a transaction. It is a convenient tool to analyze and record the effect of a
transaction in a particular account (item).
Top Account Title

Left side Right side Debit Credit
(debit) (credit)
The T account has a TOP, a LEFT SIDE and a RIGHT SIDE. On the Top of the T is the title or name of
the Account. Amounts recorded on the left side are called DEBIT amounts while amounts recorded on the
right side are called CREDIT amounts.
RULES OF DEBIT AND CREDIT
Debits and credits are used to record the increases and decreases in each account affected by a
business transaction. To understand how transactions are recorded in the books (called books of
accounts) in terms of debits and credits, one should know first which side are the different
accounting elements. The accounting equation below will determine which side are the different
accounting elements or which side is a particular account (item)
.
ASSETS = LIABILITIES + OWNER‘S EQUITY
The left side of the accounting equation has been traditionally called the DEBIT side (abbreviated DR)
while the right side of the accounting equation is called the CREDIT side (abbreviated CR). All the
asset accounts therefore, being on the left side are debits and all liabilities and owner’s equity
accounts, being on the right side are credits.
RULES OF ADDITION AND SUBTRACTION BY POSITION
Add on the same side and subtract on the opposite side.
13
Rules For Asset Accounts:
1. Add (increase) on the same side (debit).

2. Subtract (decrease) on the opposite side (credit).
3. The normal balance for an asset account is a debit balance.
Asset Accounts
Debit Credit
Increase + Decrease –
Balance
Rules For Liability and Owner’s Equity Accounts:
1. Add (increase) on the same side (credit).

2. Subtract (decrease) on the opposite side (debit).
3. The normal balance for a liability or owner’s equity account is a credit balance.
Liability and Capital

Debit Credit
Decrease - Increase +
Balance
USING THE T ACCOUNT
Being familiar with the rules of debit and credit for asset, liability, and capital accounts, these rules will be
applied by using an example problem.
Below is the example problem given on page 9, illustrating how the effect of each transaction is recorded
in the accounting equation. This time, it will be illustrated how the effect of each transaction is recorded
(posted) in the T account.
Example Problem 1.
On July 1 of the current year, Paul Brite started a TV repair business
July 1 He invested P50,000 in cash to start his business.

3 Purchased for cash shop supplies costing P3,500.
5 Brite bought from A & G Company repair equipment costing P 20,000 on credit.
8 Customers paid P12,000 cash for repair services rendered.
10 Brite made a partial payment to A & G Company, P15,000.
12 Customers were billed on account P14,000 for repair services rendered.
14 Rental for the month of July was paid, P6,000.
17 Collected P8,000 from customers as payment of their accounts.
19 Paid wages of assistant helper for the month of July, P4,000.
22 Bought additional shop supplies costing P 7,500. A down payment of P 3,000 was
made and the balance is payable at the end of the month.
25 Repair services rendered, P 9,000. Received P4,500 as partial payment.
28 Repair supplies bought for cash and used for repairs amounted to P 6,500.
31 Brite withdrew P 10,000 for his personal use.
Required: Using the following accounts: Cash, Accounts Receivable, Shop Supplies, Equipment,
Accounts Payable, P. Brite Capital, P. Brite Drawing, Repair Income, Salary Expense, Rent
Expense and Supplies Expense.
a. Post the transactions to the corresponding T Accounts.
b. Prepare a trial balance .
14
T ACCOUNTS
Cash Accounts Receivable
Repair Equipment
Shop Supplies Paul Brite, Capital
Accounts Payable Repair Income
Paul Brite, Drawing Salary Expense
Rent Expense Supplies Expense
Note: In making the T accounts, you normally provide more lines or space for Cash and other accounts
that are more frequently affected by the transactions given in the problem.
a) The T accounts are arranged using the accounting equation that starts with assets,
liabilities and owner’s equity.
b) The T account for Cash is longer (more space) because there are more transactions that affect
this account.
c) The postings to the T accounts are dated based on the dates in the transactions above. You
will be able to analyze the effects of each transaction on the different accounts by following the
dates. Chronologically.
d) Balances are determined by getting the difference between the debit totals and credit totals.
e) The balances are the amounts that will be reflected in the trial balance.
15
Solution to Example Problem 2a.
Cash Accounts Receivable

7/01 50,000 7/03 3,500 7/12 14,000 7/17 8,000
7/08 12,000 7/10 15,000 7/25 4,500
7/17 8,000 7/14 6,000 18,500 8,000
7/25 4,500 7/19 4,000 Balance 10,500
7/22 3,000
7/28 6,500
7/31 10,000 Repair Equipment
74,500 48,000 7/05 20,000
Balance 26,500 Balance 20,000
Shop Supplies Paul Brite, Capital

7/03 3,500 7/01 50,000
7/22 7,500 Balance 50,000
Balance 11,000
Repair Income
7/08 12,000
Accounts Payable 7/12 14,000
7/10 15,000 7/05 20,000 7/25 9,000
7/22 4,500 35,000
15,000 24,500 Balance 35,000
Balance 9,500
Salary Expense
Paul Brite, Drawing 7/19 4,000
7/31 10,000 Balance 4,000
Balance 10,000
Rent Expense Supplies Expense

7/14 6,000 7/28 6,500
6,000 Balance 6,500
Note: After all transactions have been entered (called posting) in the appropriate T accounts,
each account must be totaled to determine the balance. When there is only one transaction
recorded in a T account, the balance is that figure. If there are many transactions recorded
in a T account, the difference between the total debit and total credit represents the debit or
credit balance whichever is higher. The balances of the different T accounts will be
summarized and shown in the trial balance.
16
TRIAL BALANCE
A Trial Balance – is a listing of all the balances of the different accounts (assets, liabilities, capital,
revenues and expenses), as of a given time. This is prepared at the end of each month. The total of all
the accounts with debit balances must equal with the total of all the accounts with credit balances. If not,
then an error in posting (recording in the T account) must have been committed.
Purposes of the Trial Balance:

1. To check the accuracy of posting (recording in the T accounts) by testing the equality of the
debits and credits.
2. It aids in locating errors in posting.
3. It serves as a basis in the preparation of the financial statements.
The account balances determined for Paul Brite TV Repair business on page 16 will be used to illustrate
the preparation of a trial balance.

Trial Balance
July 31, 200C
ACCOUNT TITLE DEBIT CREDIT

Cash P 26,500.00 P
Accounts Payable 9,500.00
P. Brite Capital 50,000.00
P. Brite, Drawing 10,000.00
Repair Income 35,000.00
Salary Expense 4,000.00
Supplies Expense 6,500.00
Totals P 94,500.00 P 94,500.00
BUSINESS TRANSACTION FLOW
Source Journal Ledger Trial Financial

Documents to Entries to Accounts to Balance to Statements
Source Documents – are the different documents, business forms and papers (e.g. invoices, official
receipts, vouchers, memoranda, deposit slips, check stubs, cash register tapes, payroll time cards, etc.)
evidencing or supporting a transaction, which serve as the basis for recording in the books of accounts.
Books of Accounts – are the accounting books where business transactions are recorded.
The books of accounts consist of the GENERAL JOURNAL and the GENERAL LEDGER.
The General Journal – this is a two-column journal, which is called the book of original entry because this
is the first book where the business transactions are recorded.
The General Ledger - this is called the book of final entry because this is the book where the business
transactions are finally recorded. The ledger serves the same purpose as the T account but more formal
and detailed.
17
After the transactions are recorded in the general journal in terms of debit and credit, the transaction will
be further recorded in the general ledger. The process of recording in the journal is called
JOURNALIZING while the process of recording in the general ledger is called POSTING.
THE GENERAL JOURNAL
Many kinds of journal are used in business. One of the most common is the two-column general journal.
It is an all-purpose journal in which all the business transactions may be recorded. Each entry made in the
general journal includes the following information, entered in this order:
1. The date of the transaction.
2. The name of the account debited as well the amount.
3. The name of the account credited as well as the amount.
4. A posting reference (PR) indicating the account number of the account.
5. A short explanation of the transaction.
Samples of entries in the General Journal
Jan. 1 J Cruz, the owner invested cash in the business, P 50,000
GENERAL JOURNAL
Date Description P.R Debit Credit
Jan. 1 Cash 101 5 0 0 0 0 00
J. Cruz, Capital 301 5 0 0 0 0 00
Initial investment
Jan. 2 Paid advertising expense, P 51,331.50
GENERAL JOURNAL
Jan, 2 Advertising Expense 501 5 1 3 3 1 50
Cash 101 5 1 3 3 1 50
Advertising exp. Paid.
NOTE: The account debited is on the extreme left (under the description column) while
the account credited is indented a little to the right. This is to distinguish the debit
entry from the credit entry. The short explanation below the credit entry is likewise
indented to the right to distinguish it from the credit entry.
CHART OF ACCOUNTS
Chart of Accounts – is a list of all account titles and their account (code) numbers used for journalizing
business transactions.
Order of Listing the Accounts – The accounts are normally listed in the order in which they appear in the
financial statements. The Statement of Financial Condition accounts first, in the order of assets, liabilities
and owner’s equity. The Statement of Comprehensive Income accounts are then listed in the order of
revenues and expenses.
Numbering (Coding) of the Accounts – An account number identifies the account. Account numbers
may have three, four or more digits. The number of digits to be used will vary depending on the nature and
size of the business. See samples in the next page.
18
Sample Chart of Accounts (Service Business)
Statement of Financial Condition accounts Statement of Comprehensive Income accounts
100 - Assets 400 - Revenues

101 - Cash 401 - Service Income
102 - Accounts Receivable
103 - Unused Office Supplies 500 - Expenses
104 - Prepaid Rent 501 - Salary Expense
121 - Delivery Equipment 502 - Advertising Expense
122 - Accumulated Depreciation - 503 - Communication Expense
Delivery Equipment 504 - Office Supplies Expense
505 - Rent Expense
200 - Liabilities 506 - Insurance Expense
201 - Accounts Payable 507 - Miscellaneous Expense
202 - Salaries Payable 508 - Depreciation Expense
300 - Owner’s Equity

301 - Brandon Lopez, Capital
302 - Brandon Lopez, Drawing
303 - Income Summary
Sample Chart of Accounts (Merchandising Business)
Statement of Financial Condition Accounts Statement of Comprehensive Income Accounts
100 - Assets 400 - Revenues

101 - Cash 401 -Sales
102 - Notes Receivable 402 -Sales Returns & Allowances
103 - Accounts Receivable 403 -Sales Discounts
104 - Allowance for Impairment Loss
105 - Interest Receivable 500 - Cost of Sales
106 - Merchandise Inventory 501- Purchases
107 - Supplies Inventory 502- Freight-in
108 - Prepaid Insurance 503- Purchase Returns & Allowances
110 - VAT Input Tax 504- Purchase Discounts
121 - Delivery Equipment
122 - Accumulated Depreciation - 600 - Operating Expenses
Delivery Equipment
123 - Store Equipment 601- Sales Salary Expense
124 - Accumulated Depreciation - 602- Advertising Expense
Store Equipment 603- Commission Expense
125 - Office Equipment 604- Delivery Expense
126 - Accumulated Depreciation - 605- Misc. Selling Expense
Office Equipment 606- Depreciation Expense – Delivery Equipment
607 -Depreciation Expense - Store Equipment
200 - Liabilities 608-Depreciation Expense – Office Equipment
201 Accounts Payable 609 -Rent Expense
202 Notes Payable 610- Insurance Expense
203 Accrued Sundry Payable 611- Office Supplies Expense
210 VAT Output 612- Impairment Loss
211 VAT Payable 700 – Other Income
300 - Owner’s Equity 701 - Interest Income
301 Mary Modern, Capital
302 Mary Modern, Drawing 800 –Other Expense
303 Income Summary 801 - Interest Expense
NOTE: All Statement of Financial Condition accounts are called REAL ACCOUNTS and all Statement of
Comprehensive Income accounts
are called NOMINAL ACCOUNTS.
19
Example Problem 3.
Nestor Martel, a Lawyer decided to open a law firm named Martel Law Firm. The partial chart of accounts
listed below will be used for recording purposes.
Statement of Financial Condition accounts
100 – Assets 200 – Liabilities
101 - Cash 201 - Accounts Payable

102 - Accounts Receivable 204 - Loan Payable
105 - Prepaid Insurance
106 - Office Supplies 300 - Owner’s Equity
108 - Furniture and Equipment
301- Nestor Martel, Capital

302 - Nestor Martel, Drawing
Statement of Comprehensive Income accounts
400 – Revenues 500 – Expenses

401 – Legal Fees Earned 501 - Salary Expense
503 - Advertising Expense
504 - Utilities Expense
509 - Miscellaneous Expense
In December of the current year, the following transactions took place:
Dec. 2 – Nestor Martel invested P60,000 cash to put up his law firm.
4 – A one-year insurance effective December 1 was paid, P6,000.
6 – Office furniture costing P15,000 was purchased on account from EZ Furniture
Company.
8 – Office supplies costing P2,500 was bought for cash.
11 – Received from City Bank P60,000 for loan applied to be used in his law practice.
14 – Purchased on credit a desktop computer and printer for office use costing P60,000 from
Micro System Inc.
16 – Received P12,500 cash for legal services rendered to Jose Lopez.
18 – Paid P1,000 for Miscellaneous expenses incurred.
20 – Received P10,500 cash for legal services rendered to clients.
22 – Advertising placed on a local paper for three months effective December 1,was paid, P3,600.
24 – Various clients were billed for legal services rendered, P16,400.
25 – Micro System, Inc. was partially paid, P45,000.
26 – Collected the accounts from various clients, P7,500.
27 – Light, water and telephone expenses for the month of December was paid to the
owner of the property, P1,500. (Utilities expense)
28 – The salary of the secretary was paid, P5,500
29 – Nestor Martel withdrew P12,000 for personal use.
30 – Received P5,000 for legal services rendered.
Required: a) Journalize the above transactions in the general journal.

b) Post each journal entry to the general ledger.
c) Prepare a trial balance at December 31 of the current year.
20
Solution to Example Problem 3a
GENERAL JOURNAL
Page 1
Dec. 2 Cash 101 6 0 0 0 0 00
Nestor Martel, Capital 301 6 0 0 0 0 00
Initial investment by the owner
4 Prepaid Insurance 511 6 0 0 0 00

Cash 101 6 0 0 0 00
Paid Insurance for one year
6 Furniture and Equipment 108 1 5 0 0 0 00

Accounts Payable 201 1 5 0 0 0 00
Furniture purchased on account.
8 Office Supplies 510 2 5 0 0 00

Cash 101 2 5 0 0 00
Office supplies bought. for cash
11 Cash 101 6 0 0 0 0 00
Loan Payable 204 6 0 0 0 0 00
Receipt of bank loan from City Bank.
14 Furniture and Equipment 108 6 0 0 0 0 00

Accounts Payable 201 6 0 0 0 0 00
Computer equipment purchased on credit.
16 Cash 101 1 2 5 0 0 00
Legal Fees Earned 401 1 2 5 0 0 00
Legal services rendered for cash
18 Miscellaneous Expense 509 1 0 0 0 00

Cash 101 1 0 0 0 00
Miscellaneous Expense paid
21
GENERAL JOURNAL
Page 2
Dec. 20 Cash 101 1 0 5 0 0 00
Legal services rendered for cash .
22 Advertising Expense 503 3 6 0 0 00

Cash 101 3 6 0 0 00
Payment for Advertising.
24 Accounts receivable 102 1 6 4 0 0 00

Legal services rendered on account.
25 Accounts Payable 201 4 5 0 0 0 00

Cash 101 4 5 0 0 0 00
Partial payment of account
26 Cash 101 7 5 0 0 00
Accounts Receivable 102 7 5 0 0 00
Collection of accounts receivable
27 Utilities Expense 504 1 5 0 0 00

Cash 101 1 5 0 0 00
Light, water and telephone paid.
28 Salary Expense 501 5 5 0 0 00

Cash 101 5 5 0 0 00
Salary of secretary paid.
29 Nestor Martel, Drawing 302 1 2 0 0 0 00

Cash 101 1 2 0 0 0 00
Cash Withdrawal by owner.
30 Cash 101 5 0 0 0 00
Legal Fees Earned 401 5 0 0 0 00
Legal services rendered for cash.
Note:
When recording an expense paid in advance, two methods are acceptable, the asset method and the
expense method. Under the asset method an asset account (Prepaid Expense) is used (see transaction
dated December 4 as an example). Under the expense method, an expense account is used (see
transaction dated December 22 as an example). At the end of the period, an adjusting entry will be made
to adjust the amount to the correct amount of expense to be charged for the period. This will be discussed
in module 2.
22
THE GENERAL LEDGER
General Ledger is a book or file by a business where accounts are kept on separate pages or cards. In a
computerized accounting system, accounts are kept on magnetic tapes or disks but the accounts as a
group are still referred to as the ledger, or the ledger accounts. This is called the book of final entry
because this is where the transactions are finally recorded. This is the T account expanded and formalized
as a book.
The traditional general ledger format is shown below. For each account, one ledger is opened. The
account title or name is written in the middle and the account number is written on the right hand
corner of the account name. The ledger has the following column headings:
Left Side (Debit Side) Right Side (Credit Side)
1. Date 1. Date
2. Participants 2. Participants
3. Posting reference (PR) 3. Posting reference (PR)
4. Amount of debit entry 4. Amount of credit entry
Account Name Account Number

Date Particulars PR Debit Date Particulars PR Credit
Opening Accounts in the General Ledger
Before the entries in the general journal can be posted to the general ledger, an account must be opened
for all the accounts listed in the chart of accounts.
23
Solution to Example Problem 3b:
GENERAL LEDGER
Cash 101
Date Particulars P.R. Debit Date Particulars P.R. Credit
Dec. 2 J-1 6000 0 - Dec. 4 J-1 6000 -
11 J-1 6000 0 - 8 J-1 2500 -
16 J-1 1250 0 - 18 J-1 1000 -
20 J-2 1050 0 - 22 J-2 3600 -
26 J-2 750 0 - 25 J-2 45000 -
30 J-2 500 0 - 27 J-2 1500 -
28 J-2 5500 -
29 J-2 12000 -
Accounts Receivable 102

Dec. 24 J-2 1 6 4 0 0 - Dec. 26 J-2 7 5 0 0 -
Prepaid Insurance 105

Dec. 4 J-1 6 0 0 0 -
Office Supplies 106

Dec. 8 J-1 2 5 0 0 -
Furniture & Equipment 108

Dec. 6 J-1 1 5 0 0 0 -
14 J-1 6 0 0 0 0 -
Accounts Payable 201

Dec. 25 J-2 4 5 0 0 0 - Dec. 6 J-1 1 5 0 0 0 -
14 J-1 6 0 0 0 0 -
Loan Payable 204

Dec 11 J-1 6 0 0 0 0 -
24
Nestor Martel, Capital 301

Dec. 2 J-1 6 0 0 0 0 -
Nestor Martel, Drawing 302

Dec. 29 J-2 1 2 0 0 0 -
Legal Fees Earned 401

Dec. 16 J-1 1 2500 -
20 J-2 1 0500 -
24 J-2 1 6400 -
30 J-2 5000 -
Salary Expense 501

Dec. 28 J-2 5 5 0 0 -
Advertising Expense 503

Dec. 22 J-2 3 6 0 0 -
Utilities Expense 504

Dec. 27 J-2 1 5 0 0 -
Miscellaneous Expense 509

Dec. 18 J-1 1 0 0 0 -
Note: If there are no centavos in the amount column, a dash (-) is placed in the centavos column
instead of 00 (double zero).
25
Solution to Example Problem 3c:
NESTOR MARTEL LAW OFFICE

Trial Balance
December 31, 200C
ACCOUNTS DEBIT CREDIT

Cash P 78,400 P
Accounts Receivable 8,900
Prepaid Insurance 6,000
Office Supplies 2,500
Furniture and Equipment 75,000
Accounts Payable 30,000
Loan Payable 60,000
Nestor Martel, Capital 60,000
Nestor Martel, Drawing 12,000
Legal Fees Earned 44,400
Salary Expense 5,500
Advertising Expense 3,600
Utilities Expense 1,500
Miscellaneous Expense 1,000
Totals P 194,400 P 194,400
NESTOR MARTEL LAW OFFICE

Trial Balance
December 31, 200C
ACCOUNTS DEBIT CREDIT

Cash P 155,500 P 77,100
Accounts Receivable 16,400 7,500
Prepaid Insurance 6,000
Office Supplies 2,500
Furniture and Equipment 75,000
Accounts Payable 45,000 30,000
Loan Payable 60,000
Nestor Martel, Capital 60,000
Nestor Martel, Drawing 12,000
Legal Fees Earned 44,000
Salary Expense 5,500
Utilities Expense 1,500
Miscellaneous Expense 1,000 ________
Totals P 324,000 P 324,000
Note: The trial balance on top is called the Trial Balance of Balances. This is widely used in practice.
The trial balance below is called the Trial Balance of Totals. This is the preferable method
by the Bureau of Internal revenue (BIR).
26
A trial balance is prepared to check the accuracy of posting to the general ledger and
to prove the equality of the debits and credits. If the trial balance is imbalance, error/s in the recording
in the general journal as well as posting to the general ledger must have been committed and must
be located.
However, a balanced trial balance (the total of the debit column is equal to the total of the
credit column) does not necessarily mean that no errors have been committed. The following errors
cannot be detected by the trial balance:
1) No entry was made for a given transaction.

2) A journal entry was not posted to the general ledger.
3) A journal entry was posted twice.
4) Incorrect accounts were used to record a given transaction.
5) Incorrect amounts were recorded for a given transaction.
If the trial balance does not balance, the following are the common mistakes or errors:
1. Error in addition or subtraction in the general ledger or error in addition in the trial balance
itself.
2. Error of transposition, which means that digits are incorrectly interchanged. (eg. P 890 is
recorded as P 980.
3 Slide error or transplacement error, which means error in placing the decimal point. (eg.
P 150.00 is recorded as P 15.00)
Short Cuts in Locating Error/s in the Trial Balance
If the total of the debit column in the trial balance is not equal to the total of the credit
column, the following procedures may be followed to detect the error/s:
1. Get the difference between the total debits and total credits.
2. A difference of 10, 100, 1,000, etc., would probably indicate a simple error in addition either in
the trial balance or the general ledger.
3. If the difference is divisible by two,(2), the error would probably be in posting to the wrong side
(i.e., a debit is posted on the credit side or vice versa).
4. If the difference is divisible by nine (9), the error would probably be an error in transposition
or error in transplacement.
Procedures to Correct Errors in Journalizing or Posting
1. Draw a straight horizontal-line through the error and insert the correct title or amount if the
entry is incorrect or the posting is incorrect.
2. Make a correcting entry. This will correct the wrong entry recorded.
Correcting Entry – an entry made in the general journal to correct an error discovered.
27
NATURE AND ACCOUNTING FOR MERCHANDISING BUSINESS
The revenue generating activities of a merchandising business involve the buying and selling of
merchandise (items bought for resale in its original form such as goods, groceries, books, appliances,
drugs, clothing, etc.). When the merchandise is sold, the revenue is reported as Sales and its cost is
recognized as expense called Cost of Goods Sold, which is subtracted from sales to arrive at the Gross
Profit. Other expenses are then deducted to arrive at the net profit. Unsold merchandise at the end of a
given period is called Merchandise Inventory.
Sales – Cost of Goods Sold = Gross Profit – Operating Expenses = Net Profit
ACCOUNTING FOR PURCHASES OF MERCHANDISE
There are two methods of accounting or recording for merchandise purchases:
1. Periodic Inventory Method – Under this method every time a purchase of merchandise is
made, it is charged or recorded (debited) to an account called PURCHASES. When a sale is
made. A revenue account called SALES is recorded (Credited) At the end of a given period,
an inventory ( physical count of the goods unsold - called MERCHANDISE INVENTORY-
END) is made to determine the cost of goods sold. This ending inventory will then be carried
forward to the next period and will become the MERCHANDISE INVENTORY-BEGINNING.
This method of accounting is used by a merchandising concern.
2. Perpetual Inventory Method – Under this method, an account called MERCHANDISE

INVENTORY (instead of Purchases) is used to record acquisition of merchandise. When a
sale is made, two entries will be made; the first is to record the revenue account called sales
and the second is to record the cost by charging or debiting to an account called COST OF
GOODS SOLD. In this manner, the merchandise inventory account will have a running
balance and there is no need to make a physical count. If ever a physical count or an inventory
will be made, it is only for the purpose of checking the accuracy of recording but not for the
purpose of determining the ending balance of the merchandise inventory. This method is
normally used by a manufacturing concern.
In normal business practices, before purchases are made by the purchasing department, it will require an
approved Purchase Requisition before it is authorized to issue a Purchase Order for the requested
merchandise.
Purchase Requisition Form – is a written request form to buy a certain item or items. Purchase
requisition forms are generally pre-numbered consecutively to prevent misuse or loss.
Purchase Order Form – is a buyer’s formal order form indicating therein the merchandise requested in
the purchase requisition form. The pre-numbered purchase order and requisition forms will support the
purchase evidenced by an Invoice.
Purchase Discount – is a discount given to the buyer for early payment of a purchase made on credit.
Discount Period – is the period of time within which an invoice must be paid to be entitled to a discount.
Trade Discount - is a special discount (outright deduction) from the list price offered by a seller to buyers
if the order is in large quantity.
28
TERMS OF PURCHASES:
CASH OR COD (Cash on Delivery) – this means that payment is required at the time the merchandise is
delivered.
2/10, n/30 – this means that a 2% discount of the gross invoice price is allowed if payment is made within
10 days after the invoice date, and the gross price is due 30 days from the invoice date.
2/EOM, n/60 – this means that a 2% discount of the gross invoice price is allowed if payment is made up
to the end of the month and the gross price is due 60 days from the invoice date.
2/10/EOM, n/60 – this means that a 2% discount of the gross invoice price is allowed if payment is made
by the 10th of the following month, and the gross price is due 60 days from the invoice date.
Credit Term – is the term when payment for the merchandise is to be made as agreed upon by the seller
and the buyer.
Credit Period – is the time in which the buyer is allowed to pay.
TRANSPORTATION COSTS:
Freight In – this represents the transportation costs and other costs incidental to the purchase of the
merchandise.
FOB Shipping Point – this means Free on Board up to the shipping point. Freight charges will be
shouldered by the seller up to the shipping point before loading to a common carrier. Once the goods are
loaded, the buyer will pay for the freight charges.
FOB Destination – this means Free on Board up to the point of destination. The seller will pay for the
freight charges up to the buyer’s destination.
Freight Collect – this means that the buyer is to pay the freight when the merchandise arrives. If the term
is FOB destination, the buyer can deduct the cost of the freight when paying the invoice.
Freight Prepaid – this means that the seller has paid the freight on the goods at the time of shipment. If
the term is FOB shipping point, the seller can collect the cost of the freight from the buyer.
PURCHASE RETURNS AND ALLOWANCES
Merchandise may not always be received in satisfactory condition or according to the previously agreed-
on terms. The goods may be damaged or defective, or may have arrived too late. In such cases, the buyer
may return the shipment to the seller or agree to keep the shipment if granted an allowance.
Purchase Returns and Allowances – are reductions in the purchase price of merchandise bought,
resulting from merchandise returned to the seller or from the seller’s reduction in the original purchase
price.
29
RECORDING PURCHASES AND PAYMENT OF ACCOUNTS:
Note: For simplicity, the amount P10,000 for the purchase of merchandise (exclusive of 12%
Value Added Tax) is used for all the examples.
Example 1: June 1 – Purchased merchandise costing P10,000, terms COD as per invoice No.
3857.
Entry: June 1 – Purchases 10,000

Vat Input Tax (12% x 10,000) 1,200
Cash 11,200
Note: Value-added Tax is an indirect tax shouldered by the buyer. If the invoice amount is already
VAT inclusive, divide the amount by 1.12 then multiply by .12 to determine Vat Input Tax.
If the purchase is a non-vat transaction, just remove Vat Input Tax.

Cash 10,000
Example 2: June 1 – Purchased merchandise with a list price of P10,000 for cash per Invoice
No. 3857. Trade discount 10% and 15%.
Entry: June 1 – Purchases (10,000 x 90% x 85%) 7,650

Vat Input Tax (12% x 7,650) 918
Cash 8,568
.
Note: The net invoice amount is the amount recorded (list price minus by the trade discounts).
Trade discount is not recorded.
Example 3: June 2 – Purchased merchandise worth P10,000 on account per Credit Invoice No.
860. Terms: 15 days.

Vat Input Tax 1,200
Payment June 17 – Accounts Payable 11,200

Cash 11,200
Example 4: June 2 – Purchased merchandise with a price of P10,000 on account per Credit
Invoice No. 1860. Terms: 2/10, n/30.

Vat Input Tax 1,200

Cash 11,000
Purchase Discount 200
Note: Discount is computed based on the merchandise cost without VAT. If the invoice is paid
after June 12, there will be no more cash discount.
30
Example 4a: If Term is: 2/EOM, n/60.

Cash 11,000
Note: If the invoice is paid after June 30, there will be no more cash discount.
Example 4b: If Terms is: 2/10 EOM, n/60.
Payment July 10 – Accounts Payable 11,200

Cash 11,000
Note: If the invoice is paid after July 10, there will be no more cash discount.
Example 5: June 4 – Purchased merchandise with a list price of P10,000 on account per Credit Invoice
No 1865. Trade discount is 20% and 10%. Terms: 2/10, n/30.
Entry: June 4 – Purchases (10,000 x 80% x 90%) 7,200

Vat Input Tax (12% x 7,200) 864

Cash 7,920
Purchase Discount (7,200 x 2%) 144
Note: If the invoice is paid after June 14, there will be no more cash discount.
Example 6: June 6 – Bought merchandise costing P10,000 on account per Credit Invoice No. 1870.
FOB Shipping Point, Freight Prepaid by the seller, P1,000. Terms: 2/10, n/30.

Freight In 1,000
Vat Input Tax 1,320

Cash 12,120
Note: Freight or transportation cost is not included in computing the discount.
31
Example 7: June 6 – Bought merchandise on account, P 10,000.per Credit Invoice

No. 1870. FOB Shipping Point, Freight Collect, P 1,000,
Terms: 2/EOM, n/60.
Entry: June 6– Purchases 10,000

Vat Input Tax 1,200
Freight In 1,000
Vat Input Tax (12% x P 1,000) 120
Cash 1,120

Cash 11,000
Example 8: June 8 – Bought merchandise costing P10,000 on account per Credit InvoiceNo.1880. FOB
Destination, Freight Prepaid, P1,000. Terms: 2/10, n/30.

Vat input Tax 1,200

Cash 11,000
Example 9: June 8 – Bought merchandise costing P10,000 on account per Credit Invoice No.1890. FOB
Destination, Freight Collect, P1,000. Terms: 2/10 EOM, n/30.

Vat Input Tax 1,200
Cash 1,000
Payment July 10 – Accounts Payable 10,200

Cash 10,000
Note: The freight paid is deducted from accounts payable and the discount is computed based on the
invoice cost of the merchandise.
Example 10 June 2 – Purchased merchandise costing P10,000 on account per Credit Invoice No. 1900.
Term: 2/10, n/30.
June 4– Received a credit memorandum from a seller for the merchandise returned,
P2,000. (Assume VAT excluded)

Vat Input Tax 1,200
Return June 4 – Accounts Payable 2,240

VAT Input Tax 240
Purchases Returns & Allowances 2,000
32

Cash 8,800
Purchases Discounts 160
Note: Discount is computed after returns and allowances are deducted from the invoice cost. When
partial payments are made on a particular invoice within t discount period, cash discount is not
yet allowed. Cash discount is allowed only if the invoice cost net of returns and allowances are
paid in full within the discount period.
The Gross Method is used in recording Purchases in the examples given. Under the Net Method, cash
discounts are immediately deducted from Purchases and Accounts Payable. It is assumed that the
business follows a policy of paying their accounts within the discount period.
NET METHOD – Using Example 10 transaction above, the entries would be:

Vat Input Tax 1,200
Note: The account Purchases is recorded net of P 200 purchase discount.

Cash 11,000
If paid after the discount period, the entry would be:

Purchase Discount Lost 200
Cash 11,200
NET METHOD – Using Example 10 transactions above with merchandise returns:

Vat Input Tax 1,200
Return June 4 – Accounts Payable 2,200

VAT Input Tax 240
Purchase Returns and Allowances 1,960

Cash 8,800
If paid after the discount period, the entry would be:

Purchase Discount Lost 160
Cash 8,960
33
ACCOUNTING FOR SALES
The merchandise in stock will be sold and new items will be purchased to replace the items sold.
Merchandise sales are credited to the Sales account. Sales can be made on cash or credit basis under
the different terms similar to the terms of purchases discussed earlier. For every sale made, a 12% VAT
Output Tax is recorded. The difference between the VAT Output Tax and the VAT Input Tax (normally a
credit balance) represents the liability of the business to the government.
Sales Invoice - is a document that the seller gives to the buyer listing the items ordered as per the P.O.
(purchase order of the buyer), together with the quantity, price, description, value added tax, the terms,
and the total price of the items ordered.
Credit Memo – is a form used by the seller to notify the buyer that his account is credited (the amount is
reduced) for the return of defective merchandise or allowance for damaged merchandise.
Sales Discount – is a discount granted by the seller for early collection on a credit sale.
Sales Returns and Allowances – are reductions in sales, resulting from merchandise being returned by
the customer or from seller’s reduction in the original sales price.
Freight Out – this represents the cost of transporting the merchandise sold from the seller’s place to the
buyer’s place which is to be shouldered b y the seller (business).
RECORDING SALES AND COLLCTION OF ACCOUNTS:
Note: For simplicity, the amount P15,000 for the sale of merchandise (exclusive of the 12% Value-added
Tax ) is used for all the examples.
Example 1: June 2 – Sold merchandise worth P15,000 per Cash Sales Invoice No. 1001.
Entry: June 2 – Cash (112% x 15,000) 16,800

Sales 15,000
Vat Output Tax (12% x 15,000) 1,800
Note: If the amount of the invoice is VAT inclusive, divide the amount by 1.12 than multiply by .12 to
determine the VAT Output Tax.
If the sale were a non-vat transaction, the entry would be:
Entry: June 2 – Cash 15,000

Sales 15,000
Example 2: June 3 – Sold merchandise worth P15,000 per Credit Invoice No. 101. Terms: n/15. .
Entry: June 3 – Accounts Receivable 16,800

Sales 15,000
Vat Output Tax 1,800
Collection June 18 – Cash 16,800

34
Note: If the sale were a non-vat transaction, the entries would be:

Sales 15,000

Example 3: June 4 – Sold merchandise worth P15,000 per Credit Invoice n. 102. Terms: 2/10,
n/30.

Sales 15,000

Sales Discount (2% x 15,000) 300

Sales 15,000

Sales Discount (2% x 15,000) 300
Example 4: June 5 – Sold merchandise worth P15,000 per Credit invoice No. 103. FOB Shipping
Point, Freight Collect, P1,000. Terms: 2/10, n/30.

Sales 15,000

Sales Discount 300
Note: The entries are the same as in Example 3 because transportation costs are to be paid by the
customer.
Example 5: June 6 – Sold merchandise worth P15,000 per Credit Invoice No. 104. FOB Shipping
Point, Freight Prepaid, P1,000. Terms: 2/10, n/30.
Entry: June 6 -- Accounts Receivable 17,800

Sales 15,000
Cash 1,000

Sales Discount 300
Note: The transportation costs prepaid by the seller are chargeable to the customer’s account.
35
Entry: June 6 -- Accounts Receivable 16,000

Sales 15,000
Cash 1,000

Sales Discount 300
Example 6: June 7 – Sold merchandise worth P15,000 per Credit Invoice No. 105. FOB
Destination Point, Freight Collect, P1,000. Terms: 2/10, n/30.
Merchandise was received on June 9.

Freight Out 1,000
Sales 15,000

Sales Discount 300
Note: The transportation costs paid by the customer was deducted from the customer’s
account.
If the sale were a non-vat transaction, the entries would be:

Freight Out 1,000
Sales 15,000
Collection June 14- Cash 13,700

Sales Discount 300
Example 7 June 8 – Sold merchandise worth P15,000 per Credit Invoice No. 106. FOB
Destination Point, Freight Prepaid, P1,000. Terms: 2/10, n/30.
Merchandise was received on June 10.

Freight Out 1,000
Sales 15,000
Cash 1,000

Sales Discount 300
36

Freight Out 1,000
Sales 15,000
Cash 1,000

Sales Discount 300
Example 8: June 9 – Sold merchandise worth P15,000 per Credit Invoice No. 107. Terms:
2/10, n/30.
June 10 – Received merchandise returns from the customer, P2,000 and issued
credit memorandum No. 001. (Assume VAT Excluded)

Sales 15,000
Return June 10 – Sales Returns & Allowances 2,000

Vat Output Tax 240

Sales Discount 260

Sales 15,000
Return June 10 – Sales Returns & Allowances 2,000


Sales Discount 260
37
CHART OF ACCOUNTS FOR A MERCHANDISING BUSINESS:
The chart of accounts for a merchandising business (see sample on page 19) should include the different
account titles used in the preceding examples to record the purchases and sales of merchandise.
SALES AND RELATED ACCOUNTS:
Sales – this revenue account represents the merchandise sold to customers valued at selling price
whether for cash or on credit.
Sales Returns and Allowances – this represents the merchandise returned by customers or the
price adjustments allowed for damaged merchandise valued at selling price. This is to be
subtracted from sales.
Sales Discount – this represents the cash discounts granted by the seller to the customers for
early payments of their accounts.
Freight Out - This represents the cost of transporting the merchandise sold to the buyer’s place.
This is considered an expense of the seller.
PURCHASES AND RELATED ACCOUNTS:
Purchases – this represents the cost of merchandise purchased from vendors or suppliers
whether for cash or on credit.
Purchase Returns & Allowances – this represents merchandise returned to vendors or

suppliers or price adjustments for damaged merchandise valued at purchase cost.
Purchase Discount – this represents cash discounts granted by the suppliers to the buyers for
early payments of their accounts.
Freight In – this represents the cost of transporting the merchandise purchased up to the buyer’s
place. This is added to the cost of the merchandise purchased by the buyer.
Merchandise Inventory – this represents the unsold merchandise valued at cost as of a given date.
HOW TO COMPUTE THE GROSS PROFIT OF A MERCHANDISING BUSINESS
Sales P 150,000
Less: Sales Returns & Allowances P 2,000
Sales Discounts 3,000 5,000
Net Sales 145,000
Less: Cost of Goods Sold:
Mdse. Inventory – beg. 10,000
Add: Purchases P 100,000
Freight-in 4,000
Total 104,000
Less: Purchase Ret. & Allow. P 1,000
Purchase Discounts 5,000 6,000 98,000
Cost of Goods Available for Sale 108,000
Mdse. Inventory – end 18,000 90,000
GROSS PROFIT P 55,000
Note: All the above figures are assumed figures.
38
TRIAL BALANCE of a MERCHANDISING BUSINESS
A trial balance is a list of accounts in the general ledger with balances. It provides a check on the
accuracy of the posting (recording in the general ledger) by showing the equality of the total debits and
total credits.
Example Problem: (Preparing a Trial Balance)
The following ledger accounts and their balances appear in the general ledger of Modern Appliance Store
for the current year ending December 31.
Cash 255,430.00 Sales Returns & Allowances 37,500.00

Notes Receivable 60,000.00 Sales Discounts 50,650.00
Accounts Receivable 275,600.00 Purchases 2,625,250.00
Merchandise Inventory-end 1,578,650.00 Purchase Returns & Allowances 26,250.00
Prepaid Insurance 12,000.00 Purchase Discounts 40,560.00
Office Supplies 6,250.00 Freight In 60,250.00
Vat Input Tax 22,400.00 Sales Salary Expense 215,675.00
Delivery Equipment 500,000.00 Advertising Expense 33,000.00
Accumulated Depreciation 50,000.00 Commission Expense 75,250.00
Store Equipment 150,000.00 Delivery Expense 112,500.00
Accumulated Depreciation 15,000.00 Misc. Selling Expense 12,450.00
Office Equipment 50,000.00 Office Salary Expense 125,900.00
Accumulated Depreciation 10,000.00 Rent Expense 110,000.00
Accounts Payable 945,650.00 Insurance Expense 12,000.00
Notes Payable 100,000.00 Office Supplies Expense 16,800.00
Vat Output Tax 30,800.00 Tax Expense 10,250.00
Mary Modern, Capital 1,505,945.00 Misc. General Expense 6,200.00
Mary Modern, Drawing 60,000.00 Interest income 1,200.00
Sales 3,760,600.00 Interest Expense 12,000.00
39
SOLUTION – Example Problem
Modern Appliance Store

Trial Balance
December 31, 200C
Account Title Debit Credit
Cash P 255,430.00 P
Notes Receivable 60,000.00
Merchandise Inventory 1,578,650.00
Office Supplies 6,250.00
Prepaid Insurance 12,000.00
Vat Input Tax 22,400.00
Delivery Equipment 500,000.00
Accumulated Depreciation 50,000.00
Store Equipment 150,000.00
Office Equipment 50,000.00
Accounts Payable 945,650.00
Notes Payable 100,000.00
Vat Output Tax 30,800.00
Mary Modern, Capital 1,505,945.00
Mary Modern, Drawing 60,000.00
Sales 3,760,600.00
Sales Returns & Allowances 37,500.00
Sales Discounts 50,650.00
Purchases 2,625,250.00
Purchases Returns & Allowances 26,250.00
Purchases Discounts 40,560.00
Freight In 60,250.00
Sales Salary Expense 215,675.00
Advertising Expense 33,000.00
Commission Expense 75,250.00
Delivery Expense 112,500.00
Misc. Selling Expense 12,450.00
Office Salary Expense 125,900.00
Insurance Expense 12,000.00
Office Supplies Expense 16,800.00
Tax Expense 10,250.00
Misc. General Expense 6,200.00
Interest Income 1,200.00
Interest Expense 12,000.00
Totals P 6,486,005.00 P 6,486,005.00
40
PROBLEMS:
1.1 Juan Carlos is a barber and on July 1 of the current year, Carlos Barber Shop had the following
Statement of Financial Condition:
CARLOS BARBER SHOP
July 1, 20CY
ASSETS
Cash P 25,000.00
Shop Fixtures 55,000.00
Shop Equipment 170,000.00
LIABILITIES
OWNER’S EQUITY
Juan Carlos, Capital 248,500.00
TOTAL LAIBILITIES and OWNER’S EQUITY P 273,500.00
The following transactions were made during the month.
a. Purchased equipment on account, P11,500.

b. Withdrew P6,000 for personal use.
c. Paid P10,000 of the accounts payable.
d. Cash receipts for the month totaled P65,000 for services rendered.
e. Expenses paid for the month totaled P24,000.
f. Shop supplies worth P4,500 was used during the month.
REQUIRED: Indicate the effects of the above transactions on the accounting equation shown
below
ASSETS = LIABILITIES + OWNER’S EQUITY

Shop Shop Shop Accounts J. Carlos Reve-
Cash Supplies Fixtures Eqpmt. = Payable + Capital nues Expenses
Bal. 25,000 23,500 55,000 170,000 = 25,000 + 248,500
a. = __ _ + __________________________
Bal.
b. = +____________________________
Bal.
c. = + _______________________
Bal.
d. = + _______________________
Bal.
e. = + __________________________
Bal.
f. = + _______________________
Bal.
41
1.2 Andrea Bonito has decided to go into business for herself as a professional photographer and the
following transactions transpired in October:
a. She invested P300,000 to open the AB Photo Arts.

b. Paid rental for the month, P12,000.
c. Purchased for cash camera equipment worth P220,000.
d. Bought photo and developing supplies worth P18,000 on account.
e. Bought office equipment worth P45,000 on credit from Burroughs Company.
f. Received P25,000 for photography services rendered.
g. Andrea Bonito invested a computer valued at P30,000, in the business.
h. Andrea Bonito withdrew P12,000 from the business for her personal use.
i. Paid Burroughs Company P30,000 as partial payment of account.
j. Took wedding pictures and agreed to accept payment fifteen days later, P12,000.
k. Paid salary of assistant for the month, P6,000.
l. Photo supplies used for the month, P4,000.
REQUIRED:
1. Record the peso amount under the appropriate heading below to show the effect of each
transaction on the accounting equation and determine the balances after every transaction.
(See solution pattern below).
ASSETS = LIABILITIES + OWNER’S EQUITY

Accounts Photo Camera Accounts A. Bonito
Cash Receivable Supplies Equipment = Payable + Capital +Revenues -Expenses
1.3 After determining the final balances of the accounts in Problem 1.2 above, prepare the following
financial statements of AB Photo Arts for the months of October of the current year.
REQUIRED:
1. Statement of Comprehensive Income

2. Statement of Changes in Equity
3. Statement of Financial Condition
4. Statement of Cash Flows
1.4 Jose Masipag, a local CPA, completed the following transactions during January of the current
year. The following account titles are to be used.
Cash Accounts payable Insurance expense

Accounts receivable Jose Masipag, Capital Light & water expense
Office supplies Jose Masipag, Drawing Rent expense
Office Equipment Fees earned Salary expense
Office Furniture Communication expense Taxes and licenses
Notes payable Gas and oil expense
42
January 1 Jose Masipag made an initial investment of P 25,000.

2 Paid the rent for the month of January, P4,000
2 Paid fire insurance for the month of January, P300.
3 Received from George Jimenez P750 for services rendered.
3 Borrowed P5,000 from the bank giving a 60-day note.
4 Paid membership dues to PICPA, P500.
5 Tomas Buena paid P950 for services rendered to him.
5 Bought for cash a new desk and table for the office, P5,500.
6 Paid business license fee to the city, P1,000.
8 Received a check from Ben Hardin for services rendered, P850.
9 Billed Susan Salgado P5,000 for services rendered.
10 Jose Masipag withdrew P2,500 for personal use.
11 Paid P 600 for the gasoline used in business, P600.
11 Received P650 form Wilfred Arietta P650 for services rendered.
14 Paid the secretary’s salary for January 1 to 15, P2,500.
15 Purchased a computer and printer giving a note for P30,000.
16 Bought office supplies from Golden Bell Co. on account, P600.
17 Billed Samuel Donate P5,200 for services rendered.
18 Collected P3,000 from Susan Salgado to apply on her account.
19 Received cash from Fortune Company P4,750 for services rendered.
21 Paid Golden Bell Co. for office supplies purchased on January 16.
22 Jose Masipag made an additional investment of P10,000.
23 Received partial payment of P2,500 form Samuel Donate.
24 Paid the note issued on January 15..
25 Received P7,000 from Bell Company for services rendered.
28 Paid for January light and water bill, P1,200.
29 Paid the secretary’s salary for January 16 to 31, P2,500.
30 Paid Shell Service Station, P1,200 for gas and oil.
31 Paid PLDT Co. for telephone bills, P800.
REQUIRED:
a). Journalize the above transactions in the general jourtnal.

b). Prepare the T accounts and post each entry to theT accounts.
c). Prepare a trial balance.
1.5 The following ledger balances were extracted from the general ledger of Gordon Dry
Cleaning on December 31, 200E:
Cash P 22,500
Loan Payable 40,000
Due from Customers 12,600
Notes Receivable 8,000
Due to Suppliers 14,000
Furniture & Fixtures 28,000
Notes Payable 10,000
Office Equipment 50,000
Truck 180,000
REQUIRED: Based on the above information how much is the owner’s equity as of December
31, 200E?
43
1.6 The following information is made available to you by Nelson Santos, the owner of Santos
Trucking Company on June 30, 200F:
Santos Capital, Jan. 1 P 50,000
Santos Drawing 30,000
Service Income 250,000
Rent 45,000
Salaries 100,000
Advertising 40,000
Insurance 20,000
Utilities 3,800
REQUIRED: Prepare the Statement of Comprehensive Statement of Comprehensive Income and the
Statement of Changes in Equity.
1.7 The following transactions for the month of January (first month of operations) were completed by
Quality Auto Repair Shop, owned and operated by Dimas Salang.
Jan. 1 Mr. Salang invested P 50,000 to start his auto repair shop business.
1 Bought for cash tools costing P 25,500.
1 Purchased office tables and chairs from NICFUR on credit, P 12,520.
2 Received cash P 10,260 for repair service rendered to a customer.
4 Mr. Salang invested his personal tools in the business, P 1,565.
5 Received a promissory note from a customer for the repair of his car, P 7,400.
8 Borrowed P 40,000 from PNB for use in the business.
9 Issued a promissory note to Security Bank for money borrowed, P 5,000.
9 Paid advertising, P 1,800.
12 Mr. Salang withdrew cash for his personal use, P 2,000.
15 Paid the salary of the mechanic and clerk, P 16,700.
17 Rent of the shop was paid, P 3,000.
18 Office supplies bought for cash & used, P 4,236.
20 Bought a jeep, P 250,000 making a down payment of P 25,000.
20 Received cash for repair services rendered to customers, P 31,000.
21 Insured the shop from fire and paid the insurance company, P 2,670.
22 Paid the following expenses:
Telephone bill P 1,530.75
Electric bill 4,610.50
23 Made a partial payment to PNB, P 30,000.
24 Paid in full the loan with Security Bank.
25 Collected the promissory note received on Jan. 5.
26 Issued a promissory note to NICFUR in payment of the account. (see Jan. 1)
27 Bought a small piece of land for use in the business on credit, P 30,000.
28 Mortgaged the land with a bank for P 20,000.
30 Paid the following salaries:
Mechanic P 12,000
Clerk 4,500
31 Repair service rendered to various customers for cash, P 21,250.
REQUIRED:
a. Record the above transactions in the general journal.

b. Post to the T accounts.
c. Prepare the Trial Balance
d. Prepare the Statement of Comprehensive Income
e. Prepare the Statement of Changes in Equity
f. Prepare the Statement of Cash Flows..
44
1.8 D. Makita decided to put up an internet café business somewhere in Makati. The following
transactions occurred in February, its first month of operations.
Feb. 1 - The owner, D. Makita invested cash of P 200,000 and 25 units of computer
costing of P 265,000.
1 - Bought tables and chairs from Tupaz Company on credit, P 22,650.
1 - Secured a business permit from the city Hall of Makati and paid various
licenses totaling P 8,150.
2 - Total collections for the day from internet service, P 22,000.
4 - Paid the rent for February, P 12,000.
5 - Bought and used office supplies from Cunanan bookstore, P 1,260.80 on credit.
6 - Bought small tools on account from Convex Trading P 2,500.30
7 - Registered the business name with the Dept. of Trade & Industry and paid
P 2,010.50.
9 - Received a total cash of P 20,000 for the day from different customers for
the use of the computer.
10 - The owner withdrew cash fro his personal use, P 10,000.
11 - Paid miscellaneous expenses, P 1,250.
12 - Paid salaries of the mechanic and clerk, P 13,850.
13 - Cash collections for the day from internet service, P 11,080.
14 - Bought a fax machine, P 25,000 paying a down payment of 40% and
issued a note for the balance.
15 - Paid telephone bill, P 1,925 and electric bill, P 6,480.
16 - The owner invested his personal computer to the business P 18,000.
17 - The fax machine was used by a customer and collected P 250 for its use.
18 - Bought copying machine for cash, P 22,650.
20 - Collected P 1,200 from a customer for photo copying service.
23 - Received cash for internet service, P 6,890.
25 - A loan was secured from PNB, P 12,000.
28 - Paid salaries of the mechanic and clerk, P 12,670
28 - Paid Corvex Trading, P 1,000. (see transaction dated Feb. 6)
REQUIRED:
1. Record the foregoing transactions in the general journal. (see chart of accounts
below)
2. Post to the general ledger.
3. Prepare the trial balance as of February 28, 200D.
4. Prepare the Statement of Comprehensive Income for the Month ended February 28, 200D.
5. Prepare the Statement of Financial Condition.
CHART OF ACCOUNTS
ASSETS INCOME
101 Cash 401 Income from Internet
102 Tools 402 Income from Fax Machine
103 Computer Equipment 403 Income from Photo Copying
104 Furniture & Fixtures
105 Office Equipment
LIABILITIES EXPENSES
201 Accounts Payable 501 Taxes & Licenses Expense
202 Notes Payable 502 Rent Expense
203 Loan Payable 503 Office Supplies Expense
504 Miscellaneous Expense
CAPITAL 505 Salaries Expense
301 D. Makita, Capital 506 Telephone & Telegram Expense
302 D. Makita Drawing 507 Light & Water Expense
45
1.9 The following accounts in the general ledger of Rey’s Auto Repair Shop on
December 31,200D:
Cash Rey Capital Notes Payable
120,000 50,000 120,000 1,800 4,000

9,200 3,000 4,500
25,000 1,000 Rey Drawing
6,000 12,000
2,500 15,000 7,000 Loan Payable
8,000 1,800
7,000 25,000
3,600
450
1,250
Accounts Receivable
11,000 6,000 Service Income
9,200
11,000
3,500 2,500
Rent Income
Tools 8,000
1,000 Rent Expense

12,000
Salaries Expense
Furniture & Fixtures
15,000
4,000
Advertising Expense
Office Equipment
3,600
16,500
4,500
Taxes & Licenses
Machinery
3,000
50,000
Insurance Expense
16,500 Misc. Expense
450
REQUIRED:
1. Prepare the trial balance.
2. Match the DEBIT amounts against the CREDIT amounts found in the different ledger accounts and
reconstruct the journal entries made with explanation. (Start with the cash account and so forth & so
on).
46
1.10 On January 1, 200E, the following accounts appeared in the general ledger of Joni’s Repair
Shop:
Cash P 10,500 Accounts Payable P 22,000
Accounts Receivable 8,400 Loan Payable 5,000
Furniture 12,600 Joni Capital ?
Repair Equipment 54,000
During the month of January, the following transactions transpired:
Collection of accounts receivable P 4,500.

Furniture bought for cash, P 3,700.
Repair equipment bought for cash, P 12,000.
Payments of accounts, P 6,600.
Partial payment of loan, P 3,000.
Additional investment of Joni, P 10,000.
Cash withdrawal of Joni, P 4,000.
Cash received for repair services rendered, P 50,000.
Total expenses paid for the month P 27,000.
REQUIRED:
1. Open T accounts for the beginning balances.

2. Record the transactions direct to the T accounts.
3. Prepare the Statement of Changes in Equity.
4. Prepare the Statement of Financial Condition as of January 31, 200E.
5. Prepare the Statement of Cash Flows.
1.11 The following balances were extracted from the general ledger of Karen Keng, owner of the
GINHAWA MASSAGE CLINIC on December 31, 200C:
Karen Capital P 85,000 Notes Receivable P 1,200

Office Equipment 12,000 Notes Payable 8,000
Accounts Payable 16,600 Interest Income 360
Cash 18,540 Tel. & Tel. Expense 1,250
Tools 21,500 Interest Expense 220
Karen Personal 10,000 Postage & Stamps Expense 50
Accounts Receivable 21,460 Insurance Expense 4,100
Mortgage Payable 30,000 Truck 84,700
Loan Payable 20,000 Subscription & Publication Expense 160
Service Income 78,560 Office Supplies Expense 3,150
Furniture & Fixtures 8,900 Machinery 36,290
Salaries Expense 21,000 Rent Income 6,000
REQUIRED:
1. Prepare the Trial Balance (Arrange the accounts in the following order: Assets, Liabilities,
Capital, Drawing, Income, and Expense)
2. Prepare the Statement of Comprehensive Income
3. Prepare the Statement of Changes in Equity
4. Prepare the Statement of Financial Condition
47
1.12 The JM LUNA Enterprise had the following trial balance as of July 1 of the current year.
JM LUNA ENTERPRISE
Trial Balance
July 1, 20CY
A.N ACCOUNT TITLE DEBIT CREDIT
11 Cash P 22,000 P
13 Office Equipment 18,300
21 Accounts Payable 4,500
31 JM Luna, Capital 37,800
32 JM Luna, Drawing 4,800
41 Fees Earned 17,800
51 Salary Expense 3,000
52 Rent Expense 7,750
53 Communication Expense 1,250
54 Utilities Expense 1,350
55 Supplies Expense 550
56 Taxes and Licenses 600
57 Miscellaneous Expense 500
Totals P 60,100 P 60,100.
None of the journal entries for the month of July had been posted or included in the trial balance.
GENERAL JOURNAL
Date Description Debit Credit
July 1 Supplies expense 800.00
Accounts payable 800.00
Office supplies purchased on account.
2 Salary expense 7,500.00

Cash 7,500.00
Paid payroll
3 Rent expense 5,500.00

Cash 5,500.00
Paid rent for July
4 Cash 5,600.00
Fees earned 5,600.00
Received fees for services rendered.
July 5 JM Luna, Drawing 3,600.00

Cash 3,600.00
Withdrawal for personal use.
7 Communication expense 900.00

Cash 900.00
Paid PLDT for telephone bill.
8 Cash 3,900.00
Fees Earned 3,900.00
48
9 Accounts payable 800.00

Cash 800.00
Paid account for office supplies
10 Utilities expense 600.00

Cash 600.00
Paid for water bill.
14 Office Equipment. 3,200.00

Accounts payable 3,200.00
Purchase of a file cabinet on account
16 Cash 20,000.00
JM Luna, Capital 20,000.00
Cash investment of JM Luna.
18 Accounts payable 2,000.00

Cash 2,000.00
Paid partial on file cabinet.
21 Cash 9,000.00
23 Taxes and Licenses 600.00

Cash 600.00
Business license fee paid.
25 Utilities Expense 950.00

Cash 950.00
Paid electric bill.
27 Cash 10,050.00
29 Salary Expense. 7,500.00

Cash 7,500.00
Paid payroll
31 Miscellaneous expenses 500.00

Cash 500.00
Paid for miscellaneous expenses.
REQUIRED:
1. Open the accounts listed in the trial balance above in the general ledger and post the beginning
balances.
2. Post the journal entries (shown below and in the next page) to the general ledger.
3. Prepare a trial balance as of July 31 of the current year.
49
1.13 William Dixon, a professional, owns a small service business. During the month of June, several
transactions transpired which are listed below. The trial balance for July 1, of the current year is
also shown below.
WILLIAM DIXON
Trial Balance
June 1, 20CY
11 Cash P 23,500 P
12 Accounts Receivable 17,500
15 Automobile -
21 Accounts Payable 18, 500
31 W. Dixon, Capital 52, 100
32 W. Dixon, Drawing 11,000
41 Fees Earned 43, 000
55 Supplies Expense 1,250
56 Miscellaneous Expense 750
Totals P 113,600 P 113, 600
June 1 Paid the monthly rent, P6,000.

3 Collected from Robert Cruz, P7,500 for services previously billed.
5 Paid water and electric bill, P1,750.
8 Billed Doris Mendoza P8,500 for services rendered.
10 Paid PLDT telephone bill, P1,050.
12 Dixon invested his personal car worth P150,000 into the business.
14 Paid salary of secretary, P4,500.
17 Received a check for P8,500 from Doris Mendoza.(see transaction dated June 8)
19 Billed Warner Holden Co. P15,000 for services rendered.
23 Paid the account of Manila Company, P9,000.
25 Paid Ace Supply Company P950 for office supplies bought and used.
28 Paid miscellaneous bills, P650.
30 Withdrew P6,000 for living expenses.
Required:
1. Record the above transactions in the general journal.

2. Post the journal entries to the general ledger, indicating the posting reference.
3. Prepare a Trial Balance as of June 30, of the current year.
50
1.14 On June 1 of the current, Daniel Chavez established DC Modern Designs. During the month the
following transactions were completed:
June 1 Transferred his personal savings of P250,000 for his capital in the business.
3 Paid the rent for the month of June, P5,000.
5 Purchased office equipment on account, P105,000.
7 Bought a used vehicle for P180,000, paying P100,000 cash and giving a note payable for
the remainder.
9 Purchased decorating supplies for cash, P13,150.
11 Received cash of P33,000 for decorating services rendered.
13 Paid fire and casualty insurance premiums, P1,800.
15 Billed customers for job completed, P19,500.
17 Paid the bills for gas and oil used in vehicle for delivery P2,900.
19 Paid light and water bills, P2,450.
21 Received cash of P12,000 from customers for services rendered.
23 Paid miscellaneous expense, P1,950.
25 Made partial payment on the amount owned on June 7, P30,000.
28 Withdrew cash for personal use, P25,000.
30 Paid salaries of employees, P19,000.
The chart of accounts of DC Modern Designs is listed below:
Cash
Accounts receivable
Decorating supplies
Prepaid Insurance
Office Equipment
Service Vehicle
Notes payable
Accounts payable
Daniel Chavez, Capital
Daniel Chavez, Drawing
Service Income
Salary Expense
Delivery Expense
Rent Expense
Utilities Expense
Miscellaneous Expense
Required:
1. Assign appropriate three-digit account number for each account above.

2. Journalize each transaction using the above chart of accounts.
3. Post entries to the general ledger indicating the posting reference.
4. Prepare a trial balance as of June 30, of the current year.
51
1.15 Angelo Parco, had the following trial balance at the end of March of the current year.
ANGELO PARCO
Trial Balance
March 31, 20CY
11 Cash P 56,300 P
13 Prepaid Insurance 9,600
16 Automobile 200,000
21 Notes Payable 60,000
31 A. Parco, Capital 180,000
32 A. Parco, Drawing 20,000
53 Advertising Expense 18,000
54 Automobile Expense 12,650
56 Miscellaneous Expense 5,500
Totals P 592,800 P 592,800
April 1 Paid office rent for the month of April, P12,000.

3 Received cash from clients on account, P54,200.
6 Paid advertising expense, P3,000.
9 Billed on account for office supplies used, P1,200.
12 Creditors’ account were paid, P7,650.
15 Paid repairs for automobile, P1,750.
18 Miscellaneous expenses of P2,150 were paid.
21 Revenue earned and billed for the month, P92,400.
24 Gas and oil used for automobile was paid, P3,650.
26 Paid salaries for the month, P20,750.
28 Withdrew cash for personal use, P15,000.
30 Paid partial on note issued, P10,000.
REQUIRED:
1. Journalize the above transactions.
2. Open the accounts in the general ledger and post the journal entries indicating the
posting reference.
3. Prepare trial balance as of April 30, of the current year.
52
1.16 Lucy Fer is the owner of Speedy Trucking Company. After one month of operation: the following
balances were extracted on March 31, 200E from the general ledger:
Lucy Fer Capital P 140,000

Loan Payable 8,300
Cash 9,270
Tools 10,750
Lucy Fer Drawing 5,000
Service Income 72,700
Salaries Expense 7,500
Gas & Oil 3,000
Supplies Expense 1,575
Advances to Employees 180
Telephone & Telegram 625
Miscellaneous Expense 105
Truck 142,350
Taxes & Licenses 2,050
All the transactions were purely on a cash basis.
REQUIRED:
1. Trial Balance (arranged accordingly)

2. Statement of Changes in Equity
3. Statement of Cash Flows
53
1.17 The following are the normal transactions of a servicing concern:
1. The owner invested cash. 41. Bought ball pens and papers
2. Paid telephone bills. on account.
3. Borrowed money from PNB. 42. Sold the land for cash.
4. Bought office tables on credit 43. Bought filing cabinets on credit.
5. The owner withdrew cash for his personal use. 44. The owner made an addtl. cash
6. Bought computers for cash. investment.
7. Paid electric bills. 45. Services rendered on account.
8. Paid the account with the supplier. 46. Utilities paid
9. Cash received for services rendered. 47. Collected an account of a customer.
10. Billed customers for services rendered. 48. Paid the account of a certain
11. Bought tools on account. supplier.
12. Paid in full the loan with the bank. 49. The salary of the janitor is paid.
13. Bought a piece of land making a down payment. 50. Insurance premium is paid.
14. Received a promissory note for services rendered.
15. Bought office supplies on credit.
16. Paid advertisements.
17. Paid the services of a lawyer.
18. Bought newspapers for cash.
19. Paid telephone bills.
20. Issued a promissory note for money borrowed.
21. Bought stamps for cash.
22. Paid the rent of the office.
23. Bought a delivery truck with a 40% down payment.
24. Paid the following expenses: water bills, and insurance premium.
25. Paid the municipal licenses and permits.
26. Issued a note in payment of an account.
27. Received a note from a customer in payment of his account.
28. Paid the salaries of the following: office clerks and secretary.
29. Billed customers for services rendered.
30. Paid promissory note.
31. Collected a promissory note.
32. The owner brought home tools for his personal use.
33. The owner invested his typewriters in the business.
34. Mortgaged the land with the bank.
35. Cash services rendered to various customers.
36. Collected the rental of a tenant.
37. Paid interest on the loan.
38. Collected the interest on the note receivable
39. Misc. income received
40. Misc. expenses paid.
REQUIRED:
1. Prepare the journal entry (without the amount) to record the above transactions.
54
1.18 Classify the items listed below by checking the appropriate boxes.
Accounts Assets Liab. Capital Drawing Income Exp. DR CR Nominal Real

1. Accounts Receivable
2. Karen Capital
3. Karen Personal
4. Cash
5. Interest collected
6. Rent paid
7. Advertising paid
8. Interest paid
9. Rent collected
10. Salaries
11. Supplies used
12. Subscriptions & Publications
13. Mortgage Payable
14. Taxes & Licenses
15. Notes Receivable
16. Notes Payable
17. Unused Supplies
18. Postage & Stamps
19. Insurance paid
20. Light & Water
21. Loan Payable
22. Service Income
23. Office Equipment
24. Furniture & Fixtures
25. Professional fees paid
26. Delivery Truck
55
1.19 On July 31, of the current year, Cecile Hart prepared the following trial balance for her
service business.
CECILE HART
Trial Balance
July 31, 20CY
11 Cash P P 50,000
17 Office Furniture 16,500
31 Cecile Hart, Capital 60,000
32 Cecile Hart, Drawing 41,000
56 Miscellaneous Expense 1,300
Totals P 594,250 P 368,750
It is apparent that the trial balance is not correct and does not balance. The following information
was given:
4. All of the accounts have normal balances.

2. The debits to the Cash account total P140,000 and the credits to the Cash account total
P89,000.
3. A P2,000 cash receipt from a customer was not posted to the Accounts Receivable
account.
4. The balance in the Fees Earned accounts is P130,000 instead of P310,000.
5. The debits to the Office Equipment account total P309,000 and the credits to the Office
Equipment account total P188,000.
6. The balance in Cecile Hart’s capital account is P160,000.
7. The credits to the Accounts Payable account total P173,000 and the debits to the Accounts
Payable account total P50,000.
REQUIRED:
Given the above information, prepare a corrected trial balance as of July 31, of the current
year.
56
1.20 Shown below are the balances of selected accounts in the general ledger:
Cash Robert Capital

20,000 2,500 20,000
12,000 9,000
5,000 14,200
Robert Drawing Service Income

2,500 12,000
16,000
Accounts Receivable Office Equipment

16,000 5,000 15,000
Accounts Payable Expenses
9,000 15,000 14,200
REQUIRED: Based on the above T accounts reconstruct the journal entries made with
explanation.
1.21 The following purchases were made by STAREX Trading during 200F:
List Price Trade Discount Terms DR Amount CR Amount

a. P 180,000 8% COD _____________ _________ ____________ __________
b. P 17,500 10%: 5% n/60 _____________ _________ ____________ __________
c. P 200,000 3%:2%:1% n/EOM _____________ _________ ____________ __________
REQUIRED: Give the journal entries using the blank space provided.
1.22 The following Sales were made by CONDES Co. during 200C:
List Price Trade Discount Terms DR Amount CR Amount

a. P 220,000 6% n/30 ___________ __________ ____________ _________
b. P 180,500 6%: 8% COD ___________ _________ ____________ _________
c. P 150,000 10%:4% n/EOM ___________ __________ ____________ _________
REQUIRED: Give the journal entries using the blank space provided.
57
1.23 Shown below are different freight terms:
Freight Terms Who should shoulder Who will

the freight pay
a. FOB-Shipping Point – Freight Collect _____________ ______________
b. FOB –Shipping Point – Freight Prepaid _____________ ______________
c. FOB – Destination – Freight Collect _____________ ______________
d. FOB – Destination – Freight Prepaid _____________ ______________
REQUIRED: Indicate on the blank space provided whether it is the BUYER or the SELLER.
1.24 Manila Trading Company bought merchandise from Singapore Trading Company costing P 450,000
exclusive of freight charges of P 12,000 which was paid by the right party.
REQUIRED: In parallel column, record the above transactions in the books of the buyer and seller
under each of the following freight terms:
a. FOB - Shipping Point - Freight Collect

b. FOB - Shipping Point - Freight Prepaid
c. FOB - Destination Point - Freight Collect
d. FOB - Destination Point - Freight Prepaid.
1.25 The following sales were reported by LINCOLN Traders during 200B:
Invoice Date Terms List Price Date collected

a. Jan. 6 20%TD, COD P 120,000 Jan. 6
b. Feb. 2 5% TD, n/30 P 150,000 Feb.28
c. March 1 10%, 5%,TD, n/EOM P 300,000 Mar. 31
d. April 12 2/10. n/30 P 200,000 April 22
e. May 3 2/10, 1/15,n/40 P 350,000 May 18
f. June 12 2/EOM, n/60 P 125,000 July 2
g. July 4 2/10 EOM P 140,000 Aug. 9
h. Aug. 7 10% TD, 2/10, n/30 P 160,000 Aug.17
i. Sept. 1 3/10,2/15,n/40 P 180,000 Sept. 17
REQUIRED: Record the Sale & Collection in the general journal.
58
1.26 The following selected transactions of Rivermaya Traders were completed during March:
March 2 - Bought merchandise from Levi Company P 18,000 terms 10% trade discount, COD
exclusive of freight of P 1,200 which was also paid.
3 - Returned defective merchandise to Levi Company P 1,500 and was given a cash
refund.
6 - Purchased merchandise from Cortan Traders, P 10,000 terms 2/10, n/30 and
paid freight of P 500.
7 - A credit memo was received from CortanTraders for defective merchandise returned,
P 2,000.
9 - Made a partial payment to Cortan Traders, P 5,000.
16 - Paid the account of Cortan Traders in full.
REQUIRED: Journalize the above transactions.
1.27 The following selected transactions of Ocean Trading were recorded for the month of August:
August 3 -
Cash sales, P 50,000 with trade discount of 8%-5%. Freight paid P 4,000.
6 -
Gave a cash refund for defective merchandise returned, P 2,000.
7 -
Sold merchandise to Leony valued at P 35,000 terms, 2/10, 1/15, n/45.
8 -
Defective merchandise returned by Leony, P 5,000 for which a credit memo was given
to her.
11 - Leony made a partial payment of P 10,000.
22 - Collected the account of Leony in full.
REQUIRED: Journalize the above transactions.
1.28 The following selected transactions were completed by Sammy Trading during July of the current
year. Assume a 12% VAT.
July 01 Purchased merchandise from Manila Sales Company, P40,000, terms: 2/10, n/eom,
FOB shipping point, freight prepaid, P1,250.
10 Paid Manila Sales Company the invoice of July 1 less discount.
13 Purchased merchandise from Davao Wholesalers Co. P25,000, terms: 1/10, n/30, FOB
destination.
15 Returned defective merchandise to Davao Wholesalers P7,500.
18 Bought merchandise from Bacolod Trading Co. P57,500, terms: n/eom, FOB shipping point.
18 Paid freight charges on merchandise purchased from Bacolod Trading, P1,200
19 Purchased merchandise from Mercury Sales Co. P37,500, terms: 2/10, n/30, FOB
destination.
22 Paid Davao Wholesalers Co. in full.
29 Paid Mercury Sales Co. in full.
30 Paid Bacolod Trading Co. in full.
Note: In the above transactions, VAT is not yet included.
REQUIRED: Journal entries to record the above transactions.
59
1.29 The following selected transactions were completed by Fortune Sales Company during August of
the current year: Assume a 12% VAT is already included in the applicable transactions.
Aug. 2 Sold merchandise on account to Pedro Solis, P3,360, terms: 2/10, n/eom, FOB
shipping point.
3 Sold merchandise for cash to various customers, P9,800.
5 Sold merchandise on credit to Juan Castro, P7,280, terms: 2/10, n/30, FOB shipping point,
freight prepaid, P672.
11 Collected from Pedro the sales invoice of August 2 less discount.
13 Sold merchandise to Josie’s Store, P11,760, terms: 1/10, n/30, FOB destination.
14 Paid transportation costs on shipment to Josie’ Store, P448.
14 Collected from Juan Castro the invoice of August 5 less discount.
17 Received defective merchandise sold to Josie’s Store, P1,120.
23 Sold merchandise to Alex Modesto, P5,376, terms 2/10, n/30, FOB shipping point, freight
prepaid, P224.
24 Received check of P5,000 from Josie’s Store as partial payment of account.
24 Received check from Josie’s Store in full payment of account.
30 Received check from Alex Modesto in full payment of account.
1.30 The following selected transactions were completed by Metro Merchandising Company during June
of the current year. Assume that the purchases and sales transactions (including returns) are still VAT
exclusive of 12% but the freight is already vat inclusive.
June 1 Purchased merchandise from Ariva Marketing, list price, P35,000, trade discount 20%,
terms: 2/10, n/eom, FOB shipping point, freight prepaid, P1,344.
3 Purchased merchandise from Montage Trading. P17,500, terms: 2/10, n/30, FOB
destination.
5 Sold merchandise on credit to Alice Enterprise, P6,250, terms: 2/10, n/30, FOB shipping
point, freight prepaid, P504.
7 Returned defective merchandise to Montage Trading P1,500.
9 Sold merchandise to Town Sales Company, P9,750, terms: 1/10, n/30, FOB destination.
9 Paid freight costs on shipment to Town Sales Company, P616.
11 Paid Ariva Marketing, the invoice of June 1 less discount.
11 Received defective merchandise returned by Town Sales Co., P800.
11 Paid Montage Trading the invoice of June 3 in full.
11 Sold merchandise to Oscar Toledo, P6,550, terms: 2/10, n/30, FOB shipping destination,
freight prepaid, P560.
11 Received a check from Alice Enterprise in full payment of account.
17 Bought merchandise from Super Mart Company, P27,500, terms: n/eom, FOB shipping
point.
17 Paid transportation charges on merchandise purchased from Super Mart Company, P1,176.
18 Sold merchandise to Solomon Company, P8,750, terms: 1/10, n/30, FOB shipping point, freight
prepaid, P728
18 Received check from Town Sales Company in full payment of account.
19 Purchased merchandise from Manila Trading P11,400, terms: 2/10, n/30, FOB destination.
19 Received a check of P2,000 from Oscar Toledo as partial payment of account.
20 Received allowance for price adjustment for defective merchandise from Manila Trading,
P1,400.
25 Paid P10,000 to Super Mart Company as partial payment of account.
25 Sold merchandise to Solo Marketing, P3,250, terms: 2/10/,eom, n/60, FOB shipping destination.
26 Granted price adjustment allowance for defective merchandise sold to Solo Marketing, P350.
26 Paid Super Mart Company the invoice of June 17 in full.
30 Received check from Solomon Company in full payment of account.
30 Paid Manila Trading the invoice of June 19 in full.
60
1.31 The following transactions took place from Dec. 1 to Feb. 5, 2007:
Dec. 1 - Nelson invested cash of P 500,000 to put up a merchandising business.

1 - Bought office tables and chairs from Quality Furniture Terms, COD P 32,000 exclusive
of VAT.
1 - Paid taxes & licenses, P 3,250 (No VAT).
1 - Bought computer from Burroughs, Ltd. terms 2/10, n/30, P 53, 760 inclusive of VAT.
2 - Paid 3 months rent in advance to Manansala Realty Corporation, P 4,500 exclusive of
VAT. (Use the expense method)
3 - Bought merchandise from Runnex P 36,500 terms 3/10, n/60 VAT exclusive.
4 - Cash purchases, P 13,440, VAT exclusive.
5 - Paid freight on the purchases, P550, VAT exclusive.
6 - Sold merchandise to ESSO Corporation P 84,250, VAT exclusive, 50% down and the
balance, terms n/60.
7 - Paid freight on the merchandise sold P 672, VAT inclusive.
9 - Sold merchandise to CORREX TRADING, P 56,000 VAT exclusive terms 2/10, n/60
with trade discount of 10%.
10 - CORREX TRADING returned goods, P 15,000. VAT exclusive.
11 - Sold merchandise to Leonard, P 66,000 VAT exclusive terms 2/10, n/60 with trade
discount of 10%.
15 - CORREX TRADING made a partial payment of P 20,000.
16 - Paid salaries of the employees, P 32,500.
16 - Leonard returned goods, P 6,000, VAT exclusive.
17 - Paid advertising expense P 14,000, VAT exclusive
19 - CORREX TRADING paid the balance of his account.
20 - The owner withdrew cash for his personal use P 10,000.
21 - Cash Sales, P 20,160, VAT exclusive
22 - Purchased merchandise from COLLINS Co. P 35,000 terms, 2/10, n/60 with trade
discount of 5% VAT exclusive.
23 - Paid freight on the purchase above P 3,360, VAT inclusive.
24 - Made a down payment to COLLINS Co. P 15,000.
25 - Returned to COLLINS Co. goods, P 5,000 VAT exclusive.
30 - Returned defective tables to Quality Furniture P 3,000 VAT exclusive and received a
cash refund.
31 - Gave a cash returned for defective merchandise returned by the customers, P 4,000
VAT exclusive.
Feb. 1 - Paid insurance expense, P 12,500 VAT exclusive.

2 - Received a 60-day note for merchandise sold, P 10,000, Vat exclusive.
3 - Borrowed money from the bank, P 11,800. Interest of P 800 was deducted in advance.
4 - Issued a 30-day note for merchandise purchased, P 8,960, VAT inclusive.
5 - Collected the note date Feb. 2.
6 - Paid the note dated Feb. 4.
7 - Paid the VAT to the BIR, P 12,250.
REQUIRED: Record the above transactions in the general journal (without explanation).
61
1.32 Shown below are the ledger balances of Liwayway Trading on December 31, 2007.
Cash P 62,825
Merchandise Inventory –Jan. 1 60,900
Notes Payable 21,875
Ligaya Capital 265,000
Ligaya Drawing 9,500
Sales 572,875
Sales Returns 11,000
Sales Discount 6,400
Purchases 390,750
Freight-in 5,415
Purchase Returns 5,780
Purchase Discount 5,010
Salaries Expense 99,550
Rent Expense 24,000
Insurance Expense 5,250
Office Supplies Expense 2,200
Rent Income 5,000
REQUIRED:
1. Prepare the Trial Balance.
2. Prepare the Statement of Comprehensive Income (the Merchandising Inventory – December 31 is
P70,000)
3. Prepare the Statement of Financial Condition (Assuming no other adjustments).
1.33 The following information is taken from the books of JOHN COMPANY for the year 200F:
Merchandise inventory, January. 1 P 48,000 Purchases P 118,000

Freight Out 10,500 Sales discount 2,600
Purchase return & allowances 32,000 Sales 320,000
Utilities expense 48,700 Misc. Selling expense 48,000
Merchandise inventory, December 31 22,000 Rent Expense 122,000
Sales returns & allowances 5,000 Freight In 7,400
REQUIRED: Prepare the Statement of Comprehensive Income
1.34
Gross Cost Operating Net Profit
Case Profit Sales of sales Expense (Net loss)
a P 84,600 P 172,300 P (1) P (2) P 33,000
b 150,000 (3) 142,000 108,000 (4)
c (5) 345,000 282,000 (6) (13,000)
d (7) 250,000 (8) 130,000 30,000
e (9) 240,000 (10) 150,000 (30,000)
REQUIRED: Compute the missing items.
62

Module 1

Uploaded by

Copyright:

Available Formats

Module 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Module 1

Uploaded by

Copyright:

Available Formats

Introduction to Accounting Module 1

After a careful study of this module, you should be able to:

1. Know the definition of accounting and its role in business.

ROLE OF ACCOUNTING IN BUSINESS:

1. Help the owners or management make decisions.

TYPES OF OWNERSHIP STRUCTURE (Forms of Business Organization):

1. Proprietorship – is a business that is owned and operated by a single individual (the

Characteristics of the Different Forms of Business Organization:

Proprietorship Partnership Corporation Cooperative

1. One owner 1. Two or more owners 1. Unlimited owners 1. Unlimited owners

BASIC ELEMENTS OF ACCOUNTING (Accounting Values):

Statement of Financial Condition Elements (Shows the Financial Condition of the

Statement of Comprehensive Income Elements (Shows the Results of Operations)

THE ACCOUNTING PROCESS (Functions of Accounting)

RECORDING OF THE BUSINESS TRANSACTIONS

THE ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity

Assets - Liabilities = Owner’s Equity

ACCOUNTING EQUATION EXPANDED

Assets = Liabilities + Owner’s Equity

1. The two sides of the equation should always balance.

DEBIT (DR)_ CREDIT (CR)

Value/s received Value/s given up

1. J. Cruz, invested P200,000 to Cash J Cruz, Capital

2. Cruz bought repair equipment Equipment Accounts payable

3. Cruz bought Shop Supplies Shop Supplies Cash

4. Paid X Co. partially, P 60,000. Accounts payable Cash

5. Cruz received a bank loan for Cash Loan Payable

6. Customers paid cash for auto Cash Repair Income

7. Repair services rendered on Accounts receivable Repair Income

8. Paid a month’s rent, P10,000. Rent expense Cash

9. Cruz made partial collections Cash Accounts receivable

10. Cruz paid the salaries and Salary expense Cash

11. Billed a customer, P6,000. Cash Repair Income

12. Shop supplies purchased, P15,000 Shop Supplies Cash

13. Shop Supplies bought for cash Supplies expense Cash

14. Cruz withdrew P20,000 for J. Cruz, Drawing Cash

ACCOUNTING EQUATION EXPANDED

ASSETS LIABILITIES OWNER'S EQUITY

10. -15,000 = + 15,000

11. 2,000 4,000 = + 6,000

12. -5,000 15,000 = 10,000 +

13. -18,000 = + 18,000

14. -20,000 = + -20,000

ACCOUNTING EQUATION EXPANDED

ASSETS = LIABILITIES + OWNER'S EQUITY

Statement of Comprehensive Income – also called as the Statement of Comprehensive Income, is a

PROFIT FROM OPERATIONS P 38,000.00

J. CRUZ AUTO REPAIR SHOP

J. Cruz Capital, June 1 P -

It is assumed that J. Cruz started business on June 1, 200C.

J. CRUZ AUTO REPAIR SHOP

TOTAL ASSETS P 368,000.00

LIABILITIES AND OWNER’S EQUITY

Accounts Payable P 50,000.00

J. Cruz, Capital 200,000.00

TOTAL LIABILITIES & OWNER’S EQUITY P 368,000.00

J. CRUZ REPAIR SHOP

Cash Flows from Operating Activities: