Basic Accounting Principles and Process PDF

BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS ODM DEFINITION “Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part...

BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS ODM DEFINITION “Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.” – American Institute of Certified Public Accountants (AICPA) “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.” – American Accounting Association (AAA) “Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision.” – Accounting Standards Council (ASC), Succeeded by Financial Reporting Standards Council (FRSC). ACCOUNTING PRINCIPLES AND ASSUMPTIONS 1. BUSINESS ENTITY CONCEPT – This concept assumes that a business enterprise is separate and distinct from the owner or investor. It is assumed that in preparing the financial statements only the properties, liabilities, income and expenses of a particular business are reported therein. Personal properties and liabilities of the owner are not included in the business financial statements. 2. HISTORICAL COST / EXCHANGE PRICE PRINCIPLE – Assets should be recorded based on cost which is the amount exchanged at the time the item was acquired. A machine with a list price of P50,000 which was purchased at a discount of P1,000 should be recorded at P49,000. An equipment which was purchased at a price of P50,000 but could be purchased in another store for P51,000 should be recorded at P50,000. Land costing 750,000 at the time it was acquired was purchased on installment basis payable in 4 yearly installments of P200,000 or a total installment price of P800,000 should be recorded at P750,000 which is the amount or value exchanged at the time the asset was acquired. 3. GOING CONCERN ASSUMPTION – This concept supports the Exchange price or Cost principle. Based on this assumption, it is expected that the business is a continuing concern or that it has an indefinite existence. This is the reason why properties are recognized at cost without regard to the change in their market values in subsequent periods. 4. OBJECTIVITY – This principle requires that financial data entered in the records must be verifiable and supported by documents such as invoices, vouchers or official receipts. 5. ACCOUNTING PERIOD / PERIODICITY ASSUMPTION – How often should the accountant prepare the financial statements specially since it is assumed that the business is a continuing concern? It is understood that a complete and accurate financial picture of the business can only be made at the end of its life. However, since that statement users need financial information on a regular basis and the success of its business operation depends on financial information contained in the accounting reports, then its life has to be divided into specific time intervals called accounting period. 6. STABLE MONETARY UNIT ASSUMPTION – All business transactions are measured and recorded using only one unit of monetary measurement. Since money is used as a medium of exchange, it is therefore the most practical unit of measuring financial data. At this point, it is worthwhile to note that in accounting, only data measurable in terms of money are recognized and recorded in its books. 7. ACCRUAL / RECOGNITION PRINCIPLE a. REVENUE RECOGNITION PRINCIPLE – Revenue is recognized when it is earned. For a service business, revenue is earned when service has been rendered. For merchandising or manufacturing concern, revenue is earned when the merchandise or product has been sold or delivered to the customer. Thus, service rendered in June but Page 1 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  collected in July should be recorded as income in June. Note that, generally, collection whether is cash or in property is not a requirement for recognizing revenue. b. EXPENSE RECOGNITION PRINCIPLE – There can be no revenue earned without expenses being incurred. There are three ways of recognizing expenses: i. Expense is recognized when revenue is recognized because it is directly associated to it, meaning the expense would not have been incurred if there was no revenue. Example, If a customer is in a far place and you have deliver the goods he ordered, you have to spend for delivery expense. ii. Resources or assets that will benefit the business over a number of years should be spread out as expense over the years that will benefit from its use. Example, you bought a delivery truck for P50,000 and it is expected be used by the company for 5 years. Depreciation expense of P10,000 should be recognized every year for five years for using the delivery truck. iii. Periodic expenses are necessary to operate the business such as salary of your employees, rent of your store, telephone, light and water used. Most often the expenses in this category are incurred or used up by the business by hour, day or month. ELEMENTS OF FINANCIAL STATEMENTS ASSETS – resources owned and controlled by the enterprise as a result of a past event and from which economic benefits are expected to flow to the enterprise (BUSINESS RESOURCES, example: Cash, Accounts Receivable, Notes Receivable, Inventory, Prepaid Expenses, Office Supplies, Equipment, Machineries, Vehicles, Building, Land). LIABILITIES – present obligations arising from past events, the settlement of which is expected to result in an outflow of resources from the enterprise (BUSINESS OBLIGATIONS, example: Accounts Payable, Notes Payable, Accrued Expenses, Deferred Income, Loans Payable, Mortgage Payable). OWNER’S EQUITY – the residual right or interest of the owner in the enterprise net assets. INCOME – increases in economic benefits during the period in the form of cash inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those resulting from contributions of equity participants. Revenues represent the inflow of cash or other assets from clients and customers for services performed or for goods sold by the business. (Example: Service Fee, Professional Fee, Sales) EXPENSES – decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incidences of liabilities that results in decreases in equity, other than those relating to distributions to equity participants (personal drawings of owner). (Example: Rent, Salaries, Utilities, Interest, Bad Debts, Depreciation). Page 2 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang ACCOUNTING PROCESS 1. Gathering Source Documents / Business Papers & Analyzing Business Transactions (ex. OR, Bills, Invoice, Voucher) Analysis: Deciding whether the transaction must be recorded or not. Criterion: a. There must be exchange of values – For every value received by the business there must be an equal value parted with. b. It must be between two parties – at least two parties are involved in the transaction. c. It must be stated in terms of money – can be measured using one common measurement or denominator which is money. 2. Journalizing – Making transaction entries into the Journal. (Journal – the book of original entry) Ex. On January 1, 2012, Mr. O (the owner) invested the following to his business: Cash 150,000, Computers 100,000, Building 5,000,000. DATE PARTICULARS F DEBIT CREDIT 2012 JAN 1 Cash PHP 150,000.00 Equipment 100,000.00 Building 5,100,000.00 Mr. O, Capital PHP 5,350,000.00 Note: Normal balance side of the elements (also, where the element-account increases) Assets Debit Liabilities Credit Capital Credit Income Credit Expenses Debit 3. Posting – the process of transferring records from Journal to Ledger. (Ledger – the book of final entry) Cash Equipment Dr Cr Dr Cr 1-Jan PHP 150,000.00 1-Jan PHP 100,000.00 Building Mr. O, Capital Dr Cr Dr Cr 1-Jan PHP 5,100,000.00 1-Jan PHP 5,350,000.00 Page 3 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  Chart of Accounts – detailed listing of General Ledger’s accounts. SAMPLE CHART OF ACCOUNTS: ASSETS CURRENT ASSETS (1100) 1101 CASH ON HAND 1102 CASH IN BANK 1103 ACCOUNTS RECEIVABLE 1104 NOTES RECEIVABLE 1105 INVENTORY 1106 SUPPLIES 1107 PREPAID EXPENSES 1199 OTHER CURRENT ASSETS NONCURRENT ASSETS (1200) 1201 OFFICE EQUIPMENT 1201.1 ACCUMULATED DEPRECIATION - OFFICE EQUIPMENT 1202 FURNITURE AND FIXTURES 1202.1 ACCUMULATED DEPRECIATION - FURNITURE AND FIXTURES 1203 DELIVERY EQUIPMENT 1203.1 ACCUMULATED DEPRECIATION - DELIVERY EQUIPMENT 1299 OTHER NONCURRENT ASSETS LIABILITIES CURRENT LIABILITIES (2100) 2101 ACCOUNTS PAYABLE 2102 ACCRUED EXPENSES 2103 UNEARNED INCOME 2104 LOAN PAYABLE - CURRENT 2199 OTHER CURRENT LIABILITIES NONCURRENT LIABILITIES (2200) 2201 LOAN PAYABLE - NONCURRENT 2202 MORTGAGE PAYABLE 2299 OTHER NONCURRENT LIABILITIES CAPITAL 3101 OWNER, CAPITAL 3102 OWNER, WITHDRAWAL INCOME 4101 PROFESSIONAL FEE 4102 SERVICE FEE 4199 OTHER INCOME EXPENSES 5101 SALARY EXPENSE 5102 DEPRECIATION EXPENSE 5103 SUPPLIES EXPENSE 5104 UTILITIES EXPENSE 5105 LICENSES AND TAXES 5199 MISCELLANEOUS EXPENSES Page 4 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  4. Preparation of Trial Balance – a list of accounts with ledger balances (unadjusted). Being prepared to test the accuracy of Journalizing and Posting process. ODM PREFESSIONAL SERVICES UNADJUSTED TRIAL BALANCE JANUARY 31, 20XX DEBITS CREDITS CASH ON HAND 1,770,095.00 CASH IN BANK 580,500.00 ACCOUNTS RECEIVABLE 350,000.00 SUPPLIES 19,550.00 OFFICE EQUIPMENT 54,600.00 FURNITURE AND FIXTURES 85,000.00 DELIVERY EQUIPMENT 300,000.00 ACCOUNTS PAYABLE 9,775.00 LOAN PAYABLE - NONCURRENT 500,000.00 MORTGAGE PAYABLE 300,000.00 OWNER, CAPITAL 2,000,000.00 PROFESSIONAL FEE 430,500.00 SALARY EXPENSE 50,000.00 UTILITIES EXPENSE 20,000.00 LICENSES AND TAXES 10,530.00 TOTAL 3,240,275.00 3,240,275.00 Page 5 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  ODM PREFESSIONAL SERVICES WORKSHEET JANUARY 20XX UNADJUSTED TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBITS CREDITS DEBITS CREDITS DEBITS CREDITS DEBITS CREDITS DEBITS CREDITS CASH ON HAND 1,770,095.00 1,770,095.00 1,770,095.00 CASH IN BANK 580,500.00 580,500.00 580,500.00 ACCOUNTS RECEIVABLE 350,000.00 350,000.00 350,000.00 SUPPLIES 19,550.00 3,500.00 16,050.00 16,050.00 OFFICE EQUIPMENT 54,600.00 54,600.00 54,600.00 FURNITURE AND FIXTURES 85,000.00 85,000.00 85,000.00 DELIVERY EQUIPMENT 300,000.00 300,000.00 300,000.00 ACCOUNTS PAYABLE 9,775.00 9,775.00 9,775.00 LOAN PAYABLE - NONCURRENT 500,000.00 500,000.00 500,000.00 MORTGAGE PAYABLE 300,000.00 300,000.00 300,000.00 OWNER, CAPITAL 2,000,000.00 2,000,000.00 2,000,000.00 Page 6 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS PROFESSIONAL FEE 430,500.00 430,500.00 430,500.00 SALARY EXPENSE 50,000.00 50,000.00 100,000.00 100,000.00 UTILITIES EXPENSE 20,000.00 15,000.00 35,000.00 35,000.00 LICENSES AND TAXES 10,530.00 10,530.00 10,530.00 TOTAL 3,240,275.00 3,240,275.00 ACCRUED EXPENSES 65,000.00 65,000.00 65,000.00 SUPPLIES EXPENSE 3,500.00 3,500.00 3,500.00 Work Sheet for the year ended 21.12.2005 ACCUMULATED DEPRECIATION - OFFICE EQUIPMENT 910.00 910.00 910.00 ACCUMULATED DEPRECIATION - FURNITURE AND FIXTURES 708.33 708.33 708.33 ACCUMULATED DEPRECIATION - DELIVERY EQUIPMENT 3,125.00 3,125.00 3,125.00 DEPRECIATION EXPENSE 4,743.33 4,743.33 4,743.33 5. Preparation of Worksheet – to facilitate adjustments and preparation of financial statements. TOTAL 73,243.33 73,243.33 3,310,018.33 3,310,018.33 153,773.33 430,500.00 3,156,245.00 2,879,518.33 NET PROFIT 276,726.67 276,726.67 430,500.00 430,500.00 3,156,245.00 3,156,245.00 Orlando D. Manalang  6. Journalizing and Posting of Adjustments – Adjustments for any income earned but not yet collected and for expenses incurred but not yet paid. (ACCRUALS) Proforma entries: Accrual of Income Expenses Particulars Debit Credit Particulars Debit Credit Asset (Receivable) xx Expense xx Income xx Liability (Payable) xx – Adjustments for any income collected but not yet earned and for any expenses paid but not yet incurred. (DEFERRALS) Example 1: Being a Lessor, on March 31, 2012, you received advance payment for one year rent from a tenant who will start renting your property on the same date. Annual Rent is Php 600,000.00. Deferral of Income Liability method Income method (Alternative method) Date Particulars Debit Credit Particulars Debit Credit 2012 2012 Mar 31 Cash PHP 600,000.00 Mar 31 Cash PHP 600,000.00 Unearned Rent PHP 600,000.00 Rent Income PHP 600,000.00 to record advance to record advance collection collection of one year rent of one year rent Dec 31 Unearned Rent PHP 450,000.00 Dec 31 Rent Income PHP 150,000.00 Rent Income PHP 450,000.00 Unearned Rent PHP 150,000.00 to record year-end to record year-end adjustment adjustment Computation: Mar31 to Dec31 is 9 months. Rent Income is Php 450,000 (Php 600,000 x 9/12) or (9 months x Php 50,000*) *Php50,000 is the monthly rent (Php600,000/12). Example 2: Being a Lessee, on March 1, 2012, you have made advanced payment for one year rent to the landlord for a lease that will start on the same date. Annual Rent is Php 600,000.00. Deferral of Expense Asset method Expense method (Alternative method) Date Particulars Debit Credit Particulars Debit Credit 2012 2012 Mar 1 Prepaid Rent PHP 600,000.00 Mar 1 Rent Expense PHP 600,000.00 Cash PHP 600,000.00 Cash PHP 600,000.00 to record prepayment of to record prepayment of one year rent one year rent Dec 31 Rent Expense PHP 500,000.00 Dec 31 Prepaid Rent PHP 100,000.00 Prepaid Rent PHP 500,000.00 Rent Expense PHP 100,000.00 to record adjustment to record adjustment Computation: Mar1 to Dec31 is 10 months. Rent Expense is Php 500,000 (Php 600,000 x 10/12) or (10 months x Php 50,000*) *Php50,000 is the monthly rent (Php600,000/12). Note: With the examples above, the reporting period is assumed to be of calendar year. But take note that period for reporting maybe Calendar (ending December 31) or Fiscal (ending any date not December 31). Hence, if reporting period will be September 30, For Deferral of Income example, months earned will be from March 31 to September 30 only or 6 months. For Deferral of Expense example, if reporting period is September 30, months incurred will be from March 1 to September 30 only or 7 months. Page 7 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  – Adjustment for depreciation expense for every depreciable asset. (DEPRECIATION) Depreciation Expense per year = Depreciable Cost* / Estimated Useful Life *Depreciable Cost = Cost(the original acquisition cost) – Salvage value(the cost recoverable from sale of asset after its estimated useful life) Proforma Entry: DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Depreciation Expense xx Accumulated Depreciation xx Example: The building invested by Mr. O is estimated to be used for 20 years (refer to journalizing example). Salvage value is Php 100,000.00. The adjusting entry on December 31 is DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Depreciation Expense - Building PHP 250,000.00 Accumulated Depreciation - Building PHP 250,000.00 Computation: Php 5,100,000 - Php 100,000 Depreciation Expense = 20years – Adjustment as provision for doubtful accounts. (BAD DEBTS) Proforma entry: DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Bad Debt Expense* xx Allowance for Doubtful Accounts** xx *A.k.a. “Doubtful Account Expense” **A.k.a. “Allowance for Bad Debts” Bases of giving Allowance for Doubtful Accounts (the amount to be deducted from Gross Accounts Receivable to arrive at the Net Realizable Value of Accounts Receivable) % of Sales – Income Statement approach (ex. The company provides 1% of Net Sales as Bad debts expense every year) % of Accounts Receivable – Balance Sheet approach (ex. The company provides allowance for bad debts as 2% of Accounts Receivable) From aging of Accounts Receivable – Receivables are being categorized by days of past due and certain percentage of probability of not collecting such accounts are applied to every category. Per Balance Sheet : Account Receivable, gross xx Allowance for Doubtful Accounts (xx) Account Receivable, net realizable value xx Additional proforma entries: -for Write Off of Accounts Receivable DATE PARTICULARS F DEBIT CREDIT Year Month d1 Allowance for Doubtful Accounts xx Accounts Receivable xx -for Recovery of accounts previously written off Page 8 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  DATE PARTICULARS F DEBIT CREDIT Year Month d2 Accounts Receivable xx entry 1. Allowance for Doubtful Accounts xx To record recovery of accounts receivable Month d3 Cash xx entry 2. Accounts Receivable xx To record collection Ways to compute adjustment: Allowance for Doubtful Accounts Write Off Beginning Balance Ending Balance Recovery Provision = ADJUSTMENT xx = xx Example 1: Allowance for bad debts is based on 20% of Accounts Receivable for the year. Year 1 Year 2 Year 3 Year 4 AR PHP 1,000,000.00 PHP 1,250,000.00 PHP 1,562,500.00 PHP 1,953,125.00 ADA (20%) PHP 200,000.00 PHP 250,000.00 PHP 312,500.00 PHP 390,625.00 Year 1: Accounts Receivable written off is Php 50,000.00 Recovered Accounts previously written off is Php 15,000.00 Computation for Adjustment: Allowance for Doubtful Accounts Written Off PHP 50,000.00 - Balance, beg. PHP 200,000.00 PHP 15,000.00 Balance, end. PHP 235,000.00 Recovery Provision (worked back) PHP 250,000.00 PHP 250,000.00 DATE PARTICULARS F DEBIT CREDIT Year 1 Month D1 Bad Debts PHP 235,000.00 Allowance for Doubtful Accounts PHP 235,000.00 To record provision for Bad Debts Year 2: Accounts Receivable Written off is Php 30,000.00 Recovered Accounts previously Written off is Php 45,000.00 Page 9 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  Computation for Adjustment: Allowance for Doubtful Accounts Written Off PHP 30,000.00 PHP 200,000.00 Balance, beg. PHP 250,000.00 PHP 45,000.00 Balance, end. PHP 35,000.00 Recovery Provision (worked back) PHP 280,000.00 PHP 280,000.00 DATE PARTICULARS F DEBIT CREDIT Year 2 Month D2 Bad Debts PHP 35,000.00 Allowance for Doubtful Accounts PHP 35,000.00 To record provision for Bad Debts Example 2: Provision for doubtful accounts is 20% of Sales. Year 1 Year 2 Year 3 Year 4 Sales PHP 1,000,000.00 PHP 1,250,000.00 PHP 1,562,500.00 PHP 1,953,125.00 Bad debts PHP 200,000.00 PHP 250,000.00 PHP 312,500.00 PHP 390,625.00 Year 1: Accounts Receivable written off is Php 50,000.00 Recovered Accounts previously written off is Php 15,000.00 Computation for Adjustment: Allowance for Doubtful Accounts Written Off PHP 50,000.00 - Balance, beg. PHP 165,000.00 PHP 15,000.00 Balance, end. PHP 200,000.00 Recovery Provision PHP 215,000.00 PHP 215,000.00 DATE PARTICULARS F DEBIT CREDIT Year 1 Month D1 Bad Debts PHP 200,000.00 Allowance for Doubtful Accounts PHP 200,000.00 To record provision for Bad Debts Page 10 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  7. Preparation of Financial Statements Basic Financial Statements: Balance Sheet (Statement of Financial Position) – shows Liquidity, Solvency, and Stability of the Business Entity Income Statement (Statement of Comprehensive Income) – shows Profitability of the Company’s operation Cash Flow Statement (Statement of Cash Flows) – shows cash flows from operating, investing, and financing activities Capital Statement (Statement of Changes in Equity) – shows any changes to the Interest or Equity of the Owner Notes to Financial Statements – shows additional disclosures about company policies, methods being used and all computations to arriving to the balances showed at the face of Financial Statements Example of Financial Statements: ODM PREFESSIONAL SERVICES ODM PREFESSIONAL SERVICES INCOME STATEMENT CAPITAL STATEMENT FOR THE MONTH ENDED JANUARY 31, 20XX FOR THE MONTH ENDED JANUARY 31, 20XX CAPITAL, JANUARY 1 - REVENUES INVESTMENT DURING THE YEAR 2,000,000.00 PROFESSIONAL FEE 430,500.00 WITHDRAWAL DURING THE YEAR - EXPENSES NET INCOME / (NET LOSS) 276,726.67 SALARY EXPENSE 100,000.00 CAPITAL, JANUARY 31 2,276,726.67 UTILITIES EXPENSE 35,000.00 LICENSES AND TAXES 10,530.00 SUPPLIES EXPENSE 3,500.00 DEPRECIATION 4,743.33 153,773.33 NET INCOME 276,726.67 ODM PREFESSIONAL SERVICES BALANCE SHEET AS OF JANUARY 31, 20XX ASSETS LIABILITIES CURRENT ASSETS CURRENT LIABILITIES CASH 2,350,595.00 ACCOUNTS PAYABLE 9,775.00 ACCOUNTS RECEIVABLE 350,000.00 ACCRUED EXPENSES 65,000.00 SUPPLIES 16,050.00 TOTAL CURRENT LIABILITIES 74,775.00 TOTAL CURRENT ASSETS 2,716,645.00 NONCURRENT LIABILITIES NONCURRENT ASSETS LOAN PAYABLE - NONCURRENT 500,000.00 OFFICE EQUIPMENT, NET 53,690.00 MORTGAGE PAYABLE 300,000.00 FURNITURE AND FIXTURES, NET 84,291.67 TOTAL NONCURRENT LIABILITIES 800,000.00 DELIVERY EQUIPMENT, NET 296,875.00 TOTAL NONCURRENT ASSETS 434,856.67 TOTAL LIABILITIES 874,775.00 CAPITAL 2,276,726.67 TOTAL ASSETS 3,151,501.67 TOTAL LIABILITIES AND CAPITAL 3,151,501.67 Page 11 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  ODM PREFESSIONAL SERVICES CASH FLOW STATEMENT FOR THE MONTH ENDED JANUARY 31, 20XX CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME 276,726.67 DEPRECIATION EXPENSE 4,743.33 INCREASE IN ACCOUNTS RECEIVABLE (350,000.00) INCREASE IN SUPPLIES (16,050.00) INCREASE IN ACCOUNTS PAYABLE 9,775.00 INCREASE IN ACCRUED EXPENSES 65,000.00 NET CASH FLOWS FROM OPERATING ACTIVITIES (9,805.00) CASH FLOWS FROM INVESTING ACTIVITIES ACQUISITION OF OFFICE EQUIPMENT (54,600.00) ACQUISITION OF FURNITURE AND FIXTURES (85,000.00) NET CASH FLOWS FROM INVESTING ACTIVITIES (139,600.00) CASH FLOWS FROM FINANCING ACTIVITIES INVESTMENT BY THE OWNER 2,000,000.00 LOAN PROCEEDS 500,000.00 NET CASH FLOWS FROM FINANCING ACTIVITIES 2,500,000.00 NET CHANGE IN CASH 2,350,595.00 CASH, JANUARY 1 - CASH, JANUARY 31 2,350,595.00 8. Journalizing and Posting of Closing Entries a. Close Income accounts DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Income Accounts xx Income & Expense Summary xx b. Close Expense Accounts DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Income & Expense Summary xx Expenses Accounts xx c. Close Income & Expense Summary account If with Debit balance: (Result of Operation is Net Loss) DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Owner, Capital xx Income & Expense Summary xx Page 12 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  If with Credit balance: (Result of Operation is Net Income) DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Income & Expense Summary xx Owner, Capital xx d. Close Owner, drawing DATE PARTICULARS F DEBIT CREDIT 2012 Dec 31 Owner, Capital xx Owner, Drawing xx 9. Preparation of Post-Closing Trial Balance – checking the accuracy of adjustment and closing process. ODM PREFESSIONAL SERVICES POST-CLOSING TRIAL BALANCE JANUARY 31, 20XX DEBITS CREDITS CASH ON HAND 1,770,095.00 CASH IN BANK 580,500.00 ACCOUNTS RECEIVABLE 350,000.00 SUPPLIES 16,050.00 OFFICE EQUIPMENT 54,600.00 ACCUMULATED DEPRECIATION - OFFICE EQUIPMENT 910.00 FURNITURE AND FIXTURES 85,000.00 ACCUMULATED DEPRECIATION - FURNITURE AND FIXTURES 708.33 DELIVERY EQUIPMENT 300,000.00 ACCUMULATED DEPRECIATION - DELIVERY EQUIPMENT 3,125.00 ACCOUNTS PAYABLE 9,775.00 ACCRUED EXPENSES 65,000.00 LOAN PAYABLE - NONCURRENT 500,000.00 MORTGAGE PAYABLE 300,000.00 OWNER, CAPITAL 2,276,726.67 TOTAL 3,156,245.00 3,156,245.00 Page 13 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang  10. Journalizing and Posting of Reversing Entries – done every first day of next accounting period. Adjusting entries that are subject to reversal; Accruals, Deferral of income (under income method), Deferral of expense (under expense method) Example: Refer to adjustment example Income method Date Particulars Debit Credit 2012 Mar 31 Cash PHP 600,000.00 Rent Income PHP 600,000.00 Dec 31 Rent Income PHP 150,000.00 Unearned Rent PHP 150,000.00 Jan 1 Unearned Rent PHP 150,000.00 Rent Income PHP 150,000.00 Expense method Date Particulars Debit Credit 2012 Mar 31 Rent Expense PHP 600,000.00 Cash PHP 600,000.00 Dec 31 Prepaid Rent PHP 100,000.00 Rent Expense PHP 100,000.00 Jan 1 Rent Expense PHP 100,000.00 Prepaid Rent PHP 100,000.00 “An investment in knowledge always pays the best interest.” —Benjamin Franklin Page 14 of 14 : BASIC ACCOUNTING: ACCOUNTING PRINCIPLES AND PROCESS Orlando D. Manalang