Lesson 5 – ADJUSTING ENTRIES

Adjusting Entries –
 are journal entries made usually at the end of an accounting period to adjust or update the balances of
some accounts in order to present more fairly and accurately the results of operations and the financial
condition of the business.

 Purpose of adjusting entries

1. To take up unrecorded income and expense of the period.
2. To split mixed accounts into real and nominal elements

Accrual Basis
 Financial statements, except for cash flow statements, are prepared under accrual basis of accounting.
 The effects of the transactions and other events are recognized when they occur not as cash is
received or paid.
 income is recorded when services are rendered, whether collected or not, and expense is recorded at
the time it is incurred, whether paid or not.

Adjusting Entries:
1. Accrual of Income and Expenses
2. Recognition of depreciation expense and bad debts expense
3. Deferrals of income and expenses or splitting of mixed accounts

1. Accrual of Income and Expenses

a. Accrual of income
 unrecorded income – also called accrued income, income already earned but not yet collected.

 Adjusting entry to take up unrecorded income,

Pro-forma entry:
Receivable xxx
Income xxx
 Example:
Interest in the amount of P 150.00 on notes receivable from a client has already been earned but
not yet collected.

Adjusting Entry:
Interest Receivable 150
Interest Income 150
Accrued interest on notes receivable

Exercises: Prepare adjusting entries for the following independent cases:

a) Accrued interest on notes receivable amounted to P 1,500.
b) The notes receivable among the assets amounts to P 250,000, dated October 1 of the current year
bears interest of 12% per annum. No interest has been recorded.

b. Accrual of Expense
 unrecorded expenses – also called accrued expenses - refers to expenses already incurred but not
yet paid for:

 Adjusting entry to take up unrecorded expenses –

 pro-forma entry:
Expense xxx
Payable xxx
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 To take up unrecorded expense.

 Example:
At the end of the year, rent for the month of December amounting to P 3,000 has not yet been
paid.
Adjusting entry:
Rent Expense 3,000
Rent Payable 3,000
To record rent for December.

Exercises: Prepare adjusting entries for the following independent cases:

a. Accrued interest on notes issued amounted to P 3,000.
b. The business owner pays his helpers every Friday. The year ends on Tuesday when the
helpers have to be paid P 5,000 for work performed.
c. On December 1, 2021, the business borrowed P 250,000 from a local bank for 90 days at 12%
interest. No interest has been recorded as of December 31, 2021.
d. In December, the business advertised in the local paper at a cost of P3,000, which amount is
unpaid and unrecorded.

2. Recognition of depreciation expense and bad debts expense

a. Adjusting entry to take up depreciation of property and equipment –
 Depreciation accounting - is the process of allocating the cost of property and equipment over its
estimated useful life. The portion of the cost assigned to any year is called depreciation . All property
and equipment are subject to depreciation except land.

 Pro-forma entry:
Depreciation Expense - xxx
Accumulated Depreciation xxx
To take up depreciation for the year.
 Example:
On January 2, 2021, an equipment was purchased for P 25,000. It is expected to be useful for 5
years at the end of which it can be sold for P 2,500.

To compute for annual depreciation:

Annual depreciation = Cost less Salvage value / useful life

Annual depreciation = 25,000 – 2,500 = P 4,500/ year

5 years

Adjusting entry to record depreciation at the end of the year: December 31, 2021:

Depreciation Expense – Office Equipment 4,500

Accumulated Depreciation – office Equipment 4,500
To take up depreciation for the year.

Exercises: Prepare adjusting entries as of December 31, 2021, end of the accounting period.
The Property, Plant and Equipment account contains the following breakdown

Account Cost Salvage value Estimated life Acquisition date

Building 500,000 10% 25 years March 15, 2020
Equipment 200,000 20,000 5 years April 14, 2021
Machineries 340,000 40,000 5 years June 18, 2021
Furniture & 160,000 10,000 5 years July 19,2021
Fixtures

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 Based on the depreciation policy of the company, full month depreciation shall be allotted to acquisitions for
the first half month, otherwise no depreciation is recognized for the month.

b. Adjusting entry to take up bad debts

 Bad debts - , also called uncollectible accounts expense - are losses sustained because the
business entity is not able to collect its accounts receivable.

 Pro-forma entry:
Bad debts xxx
Allowance for bad debts xxx
To take up provision for bad debts.

 Example:
It is estimated that 5% of the outstanding accounts receivable of P 150,000 is doubtful of
collection. To compute for bad debts or doubtful accounts expense:

Accounts receivable 150,000

Multiply by 5%
Bad debts or doubtful accounts 7,500

Adjusting entry:
2021
Dec. 31 Bad debts 7,500
Allowance for bad debts 7,500
To take up provision for bad debts.

Note: Other terms: 1. doubtful accounts expense/allowance for doubtful accounts

2. Uncollectible accounts expense/ Allowance for uncollectible accounts

3. Deferrals of income and expenses or splitting of mixed accounts

a. Adjusting entry to take up expired cost as expense and unexpired cost as asset
Prepaid expense – is an expense which has been paid for in advance, the benefits of which have not
yet been received.

Methods of recording prepaid expense:

1. Asset method - is used when an asset account was debited at the time payment for such expense
is made.

2. Expense method – is used when expense account was debited at the time payment for such
expense is made.

 Example:
On December 1, 2021, office supplies costing P 6,000.00 were bought. A physical count on
December 31, 2021 shows office supplies still on hand of P 2,000.00

1. Asset method:
Journal entry :
2021
Dec. 1 - Office Supplies 6,000
Cash 6,000
To record purchase of office supplies.
Analysis:
As of Dec. 31, 2021 – office supplies is mixed account – used portion is P 4,000 and the
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 unused portion is P 2,000. Office supplies an asset account has a balance of P 6,000
as of December 31, 2021 is overstated because the correct balance should be the
unused portion as of December 31 of P 2,000. It includes the used portion of P 4,000
An adjustment should be made to recognized office supplies expense, P 4,000 (used
portion) and decrease office supplies account by P 4,000 to have a balance of P 2,000
(unused portion) after adjustment.

* the adjusting entry to take up supplies used is:

2021
Dec. 31 - Office Supplies Expense 4,000
Office Supplies 4,000
To take up supplies expense.

2. Expense Method –
Journal entry:
2021
Dec. 1 - Office Supplies Expense 6,000
Cash 6,000
To record purchase of office supplies.
Analysis:
As of Dec. 31, 2021 – office supplies expense is mixed account – used portion is P 4,000 and
the unused portion is P 2,000. Office supplies expense account with a balance
of P 6,000 as of December 31, 2021 is overstated because the correct balance should be
the used portion as of December 31 of P 4,000. It includes the unused portion of P 2,000.
An adjustment should be made to recognized office supplies unused of P 2,000
and decrease office supplies expense account by P 2,000 to have a balance of P 4,000
(used portion) after adjustment.

* the adjusting entry to take up supplies unused is:

2021
Dec. 31 - Office Supplies 2,000
Office Supplies Expense 2,000
To take up supplies unused or on hand.

Note: to determine the method used - asset or expense method - identify the account debited on the date
of payment. If asset account was debited ( office supplies, prepaid rent) asset method is used but If
expense account was debited ( office supplies expense, Rent expense) then expense method is
used. The adjustments to be made is based on the method used or the account debited .

Exercises: Prepare adjusting entries for the following independent cases:

a. Prepaid Rent account was debited on July 1, 2021 for payment of a two-year advance rental of
P 48,000.
b. Insurance Expense o of P 36,000 was debited on October 1 of the current year for 3-year coverage
commencing in the fourth quarter of the current year.
c. Office supplies account had a P 1,500 balance at the beginning of the year, P 6,000 of supplies was
purchased during the year and an inventory of unused supplies at year end totaled P 1,800.

b. Adjusting entry to take up earned revenue as income and unearned revenue as liability
Unearned revenue – also called deferred income, is income received in advance before services are
rendered.

2 methods of recording unearned revenue:

1. liability method –is used when liability or unearned account was credited at the time collection of
such income was made.
2. income method – is used when revenue account was credited at the time collection of such income
was made.

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  Example:
On December 1, 2021 commissions amounting to P 12,000 were received in advance from a
real estate agency. At the end of the year, only 1/3 was actually earned.

1. Liability method –
The journal entry on:
2021
Dec. 1 - Cash 12,000
Unearned Commission 12,000
To take up receipt of commission
Analysis:
As of Dec. 31, 2021 – Unearned commission is mixed account – earned portion
(1/3 earned) is P 4,000 and the unearned portion (2/3) is P 8,000. Unearned commission,
a liability account with a balance of P 12,000 as of December 31, 2021 is overstated
because the correct balance should be the unearned portion of P 8,000 as of December
31. It includes the earned portion or income of P 4,000. An adjustment should be made to
recognized income (earned portion) of P 4,000 and decrease unearned commission
account by P 4,000 to have a balance of P 8,000 (unearned portion) after adjustment.

* the adjusting entry to take up commission income is:

2021
Dec. 31 - Unearned Commission 4,000
Commission Income 4,000
To take up commission income

2. Income Method
The journal entry on:

2021
Dec. 1 - Cash 12,000
Commission Income 12,000
To take up receipt of commission
Analysis:
As of Dec. 31, 2021 – Commission Income is mixed account – earned portion
(1/3 earned) is P 4,000 and the unearned portion (2/3) is P 8,000. Commission,
Income account with a balance of P 12,000 as of December 31, 2021 is
overstated because the correct balance should be the earned (income) portion of P 4,000
as of December 31. It includes the unearned portion of P 8,000. An adjustment should be
made to recognized unearned commission of P 8,000 and decrease commission income
account by P 8,000 to have a balance of P 4,000 (earned portion) after adjustment.

* the adjusting entry to take up commission income is:

2021
Dec. 31 - Commission Income 8,000
Unearned Commission 8,000
To take up unearned commission

Note: to determine the method used - Liability or income method - identify the account credited on the
date of receipt. If liability account was credited ( Unearned rent) liability method is used but If
income account was credited ( Rent Income) then income method is used. The adjustments to be
made is based on the method used or account credited on the date of receipt.

Exercises: Prepare adjusting entries for the following independent cases:

a. Unearned Service Income account balance of P 8,000 includes P 6,000 representing services already
performed.
b. A tenant agreed on October 1 of the current year to rent a small space at P 5,000 per month and on that
date paid six months rent in advance. The amount received from the tenant was credited to Unearned
Rent.
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 c. Assume the same data in letter b above, except that the credit was made to Rent Income account.
d. Service Income balance of P 128,000 includes P 5,000 corresponding services for which are yet to be
performed.

Illustrative problem1
Adjusting Entries

The following trial balance was taken from the books of Super Cleaners Enterprises at the end of its accounting year,
December 31, 2021:

Super Cleaners Enterprises

Trial Balance
December 31, 2021

Cash P 140,000
Accounts Receivable 50,000
Allowance for Uncollectible Accounts P 2,000
Notes Receivable 10,000
Supplies on hand 31,000
Cleaning Equipment 75,000
Office furniture and equipment 35,000
Accounts Payable 40,000
Notes Payable 15,000
A. Malinis, Capital 170,000
A. Malinis Drawing 5,000
Service Income 218,620
Salary Expense 36,500
Insurance Expense 1,200
Rent Expense 24,000
Utilities Expense 27,850
Taxes and licenses 4,620
Miscellaneous expense 5,450
------------ ------------
P 445,620 P 445,620

The following data are available for adjusting entries:

1. It is estimated that 10% of outstanding accounts receivable will become uncollectible.
2. Cleaning equipment was acquired on March 1 of the current year and is expected to be useful for 4 years at the end
of which salvage value is P 3,000.
3. Office Furniture was purchased on July 1 of the current year and expected to be useful for 4 years and have no
salvage value.
4. Accrued interest on notes payable, P 750.
5. Supplies actually used amounted to P 26,500.
6. Rent Expense represents payment for 12 months rent in advance on April 1 of the current year.
7. Salaries still unpaid at the end of the year amounted to P 5,000.
8. Service income includes P 3,000 advance payment from a customer for services to rendered next year.
9. Unpaid light bills amounted to P 3,500.
10. Accrued interest on notes receivable, P 200.

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REQUIRED: Prepare the adjusting entries

Solution
GENERAL JOURNAL

Date Particulars PR Debit Credit

202
1 31 (1) Uncollectible Accounts Expense P 3,000
Dec.
Allowance for Uncollectible Accounts P 3,000
Provision for estimated uncollectible
accounts

(2) Depreciation Expense – Cleaning 15,000

Equipment
Accumulated Depreciation – Cleaning 15,000
Equipment
Provision for depreciation.

(3) Depreciation Expense – Office Furniture 4,375

Accumulated Depreciation – Office 4,375
Furniture
Provision for depreciation.

(4) Interest Expense 750

Interest Payable 750
Accrued interest on notes payable.

(5) Supplies Expense 26,500

Supplies on hand 26,500
Supplies used.

(6) Prepaid rent 6,000

Rent Expense 6,000
3-months rent paid in advance.

(7) Salary Expense 5,000

Salary Payable 5,000
Accrued salaries.

(8) Service Income 3,000

Unearned Service Income 3,000
Unearned income.

(9) Utilities Expense 3,500

Utilities Payable 3,500
Unpaid light bills

(10) Interest Receivable 200

Interest Income 200
Accrued interest on notes
receivable.
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Adjusting Entries Explained and Computations given:

1. Uncollectible Accounts Expense:

Accounts Receivable P 50,000
x rate 10%
Required Balance P 5,000
Less: unadjusted balance of allowance 2,000
Uncollectible Accounts Expense P 3,000
* The required balance of allowance for uncollectible accounts after adjustment is equal
to 10% of accounts receivable, so the beginning balance of allowance should be
deducted to get bad debts or uncollectible accounts expense for the period.

2. Depreciation Expense – Cleaning equipment

Cost P 75,000
Less: Salvage value 3,000
Depreciable value P 72,000
Divide by estimated useful life 4 years
Depreciation per annum P 18,000

Depreciation for 10 months = P 18,000 x 10/12 = P 15,000.

* The cleaning equipment was purchased on March 1 of the current year, therefor
depreciation the
current year should for 10 months ( March 1 to December 31)

3. Depreciation Expense – Office Furniture

Cost P 35,000
Divide by estimated useful life 4 years
Depreciation per annum P 8,750

Depreciation for 6 months= P 8,750 x ½ = P 4,375

* The office furniture was purchased on July 1, therefor depreciation the current
year
should for 6 months ( July 1 to December 31)

4. Interest expense already incurred but unpaid – accrued interest expense

5. Supplies actually used amounted to P 26,500.

* Asset method – Supplies on hand was debited on the date of purchased – listed in the Trial balance, but as
of
December 31 P 26,500 were actually used. The difference of P 4,500 ( 31,000 – 26,500) represents
supplies
Unused and on hand. To adjust: recognize supplies expense and decrease supplies on hand by P 26,500
to have
an adjusted balance of P 4,500.

6. Rent Expense represents payment for 12 months rent in advance on April 1 of the current year.
* Expense method - Rent expense was debited on the date of payment as shown in the trial balance.
The payment was for 1 year starting April, 2021 to March, 2022. As of December 31, 2021, Rent Expense
account is a mixed account – expense portion – 9 months – P 18,000 ( P 2,000 x 9 April to Dec.) while
prepaid

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 or asset portion - 3 months- P 6,000 ( 2,000 x 3 -January to March 2022). To adjust: recognize the
prepaid Rent
for P 6,000 and decrease the rent expense account by P 6,000 to have an adjusted balance of P 18,000.

7. Salaries still unpaid at the end of the year amounted to P 5,000.

*Accrued salaries - already incurred but not yet paid.

8. Service income includes P 3,000 advance payment from a customer for services to rendered next year.
* As of December 31, Service income account is overstated because includes P 3,000 as advance
payment..
Income is still unearned.. To adjust: decrease Service income P 3,000 and recognize Unearned Service
Income.

9. Unpaid light bills amounted to P 3,500. – accrued expense

10. Accrued interest on notes receivable, P 200. – accrued income

THE ADJUSTED TRIAL BALANCE

SUPER CLEANERS ENTERPRISES

Adjusted Trial Balance
December 31, 2021

Debit Credit
Cash P 140,000
Accounts receivable 50,000
Allowance for Uncollectible Accounts P 5,000
Notes Receivable 10,000
Interest Receivable 200
Supplies on hand 4,500
Prepaid Rent 6,000
Cleaning Equipment 75,000
Accumulated depreciation – Cleaning Equipment 15,000
Office Furniture 35,000
Accumulated depreciation - Office Furniture 4,375
Accounts Payable 40,000
Notes Payable 15,000
Interest Payable 750
Salary Payable 5,000
Utilities Payable 3,500
Unearned Service Income 3,000
A. Malinis, Capital 170,000
A. Malinis, Drawing 5,000
Service Income 215,620
Salary Expense 41,500
Supplies Expense 26,500
Insurance Expense 1,200
Rent Expense 18,000
Utilities Expense 31,350
Taxes and Licenses 4,620
Miscellaneous Expense 5,450
Uncollectible Accounts Expense 3,000
Depreciation Expense – Cleaning Equipment 15,000
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 Depreciation Expense -|Office Furniture 4,375
Interest Expense 750
Interest Income . 200
P 477,445 P 477,445

Post the adjusting entries to the general ledger to get the adjusted balances: Example:

Supplies on hand Supplies Expense Rent Expense

31,000 AJE AJE 26,500 24,000 AJE
26,500 6,000
4,500 18,000

Prepaid Rent Salary Expense Salary Payable

AJE 6,000 36,500 AJE 5,000
AJE 5,000
41,500

Allowance for Uncollectible Accounts Service Income Unearned Service Income

Bal. 2,000 AJE 3,000 Bal. AJE 3,000
218,620
AJE 3,000 215,620
5,000

Uncollectible accounts expense Interest Receivable Interest Payable

AJE 3,000 AJE 200 AJE 750

Utilities Expense Interest Income Interest Expense

AJE 3,500 AJE 200 AJE 750

Depreciation Expense – Cleaning Accumulated Depreciation-

Utilities Payable Equipment Cleaning Equipment
AJE 3,500 AJE 15,000 AJE 15,000

Depreciation Expense – Office Accumulated Depreciation-

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 Furniture Office Furniture
AJE 4,375 AJE 4,375

Lesson 5 – Adjusting Entries

Activities:
Problem 1.

Prepare the adjusting journal entries for the following additional information available for XY Company at the end of the
year, December 31, 2021:

a) Supplies on hand account is shown in the books with a balance of P 4,500. An actual count shows only P 1,500
worth of supplies are still on hand.

b) Interest of P 600 was debited to Prepaid Interest account for interest paid in advance on a 60-6% promissory note
dated December 15.

c) Salaries of P 8,500 remain unpaid as at the end of the year.

d) Office Equipment costing P 15,000 and acquired on July 1 of the current year is expected to be useful for 4 years at
the end of which it can be sold for P 3,000

e) Commission Income account which is shown in the books at P 1,000 is only ¾ earned.
f) Office furniture acquired on April 1 of the current year at a cost of P 10,000 is expected to be useful for 3 years and
have a scrap value of P 1,000.

g) Advertising Expense account of P 5,000 represents payment for the cost of advertisement to appear in five monthly
issues of the The Professional Journal beginning October of the current year.

h) A bill for P2,000 for services rendered to a client has not yet been collected.
i) A fire insurance policy for P 500,000 on various property of the business was taken on April 1 of the current year
with a premium payment of P 6,000 which was charged to Insurance Expense account.

j) It is expected that only 95% of outstanding accounts receivable of P 25,000 will be collectible.

k) The following expenses have not year been paid: Light, P 1800; Water , P 800 and Telephone, P 1,200.

l) Unearned Rental Income account which shown in the books at P 6,000 is already 75% earned.

m) A Truck bought on October 1 of the current year at a cost of P 800,000 is expected to be useful for 10 years and
have no salvage value.

n) No interest has been recorded on our own 90-12% promissory note for P 15,000 dated November 16 of the current
year.

o) Rent for 2 years in advance was paid on August 1 of the current year for P48,000. (Use expense method)

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Problem 2:

John Bala is a lawyer specializing in corporate tax law. Provided below is a trial balance taken on Dec. 31, 2021:

Bala Legal Services

Trial Balance
December 31, 2021

Cash P 65,000
Accounts Receivable 10,000
Notes Receivable 5,000
Prepaid Insurance 12,000
Office Supplies 8,000
Office Equipment 100,000
Office furniture and fixtures 40,000
Computer Equipment 60,000
Accounts Payable P 5,000
Notes Payable 50,000
Bala, Capital 77,000
Bala, Withdrawals 35,000
Consulting Revenues 390,000
Salary Expense 120,000
Rent Expense 34,000
Utilities Expense 25,000
Telephone Expense ___8,000 ________
P 522,000 P 522,000

Additional Information:
1. Office supplies on hand at year-end amounted to P 3,000.
2. A premium of P 12,000 for a one-year insurance policy was paid on September 1, 2021.
3. Salaries earned by legal aide, which have not yet been paid amounted to P 3,000.
4. On January 1 of the current year, Bala purchased office Equipment which cost P 100,000 with an expected
life of 5 years and no salvage value.

5. Computer equipment costing P 60,000 with an expected useful life of three years and no salvage value
was purchased on April 1 of the current year.

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 6. Office furniture was acquired on January 2 of the current year and is expected to be useful for 5 years at
the end of which salvage value is P 2,000.

7. It is estimated that 5% of outstanding accounts receivable will be uncollectible.

8. Accrued interest on notes payable, P 500.
9. Accrued interest on notes receivable, P 100.
10. Accrued expenses are: rent, P 2,000; Utilities, P 1,000 and Telephone, P 1,500

REQUIRED: Prepare adjusting entries and adjusted trial balance

Problem 3 :
The following account balances appear in the books of LC LAUNDRY as of the end of the year December 31, 2021 after
adjustments:

Accumulated depreciation – laundry equipment 4,000

Laundry Supplies 8,000
Accounts Receivable 10,900
Repairs and Maintenance 1,400
Salary Payable 1,550
Interest receivable 150
Accounts payable 121,200
Laundry Equipment 80,000
Cash 33,900
Interest income 150
Accumulated depreciation – Delivery Truck 12,000
Laundry Salaries 14,500
Bad debts expense 1,090
Notes Receivable 15,000
Depreciation expense – Delivery Truck 12,000
Notes Payable 10,000
Laundry Supplies Expense 15,000
Unearned Laundry Income 4,000
Linis Cami, Capital 104,000
Interest Payable 100
Laundry Income 90,300
Allowance for bad debts 1,090
Rent Expense 8,000
Delivery Salaries 12,000
Delivery Truck 120,000
Light and water Expense 3,700
Taxes and Licenses 2,100
Linis, Cami, Drawing 6,550
Depreciation expense- laundry equipment 4,000
Interest expense 100

REQUIRED: Adjusted Trial Balance

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 Lesson 6 - Preparation of Financial Statements and Completing the
Accounting Cycle for Service Business (closing Entries
Post Closing Trial Balance and Reversing Entries)

Financial Statements
 are the means by which the information accumulated and processed in financial accounting is
periodically communicated to the users.

 are structured financial representation of the financial position

Complete Set of Financial Statements (per revised PAS No. 1)

1. Statement of Financial Position

 formal statement showing the financial position of an enterprise as of a particular or specific
date.
 shows the three elements of financial position, namely, assets, liabilities and equity.

2. Income Statement/Statement of Comprehensive Income

 formal statement showing the results of operation for specific or given period.
 presents the revenue, expenses, gains and losses and net income or loss recognized.

3. Statement of changes in equity -

 presents a summary of changes in capital such as investment, profit or loss and withdrawals during
a specific or given period.

4. Cash Flow Statement

 provides information about the cash receipts and cash payment of an enterprise during a specific or
given period.

5. Notes, comprising a summary of significant accounting policies and other

explanatory information

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  Notes to Financial statements provide a narrative descriptions or disaggregation of items presented in
the statements and information about the items that do not qualify for recognition in the statements.

6. A Statement of Financial Position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its
financial statements or when it reclassifies items in its financial statements.

THE INCOME STATEMENT

Forms:

A. Functional Income Statement - classifies expenses according to their function

B. Natural Income Statement - expenses are aggregated according to their nature and not allocated among the various
functions.

Natural Income Statement

SUPER CLEANERS ENTERPRISES

Income Statement
Year Ended December 31, 2021

Income:
Service Income P 215,620
Interest Income 200
Total P 215,820

Less: Expenses
Salary Expense P 41,500
Supplies Expense 26,500
Insurance Expense 1,200
Rent Expense 18,000
Utilities Expense 31,350
Taxes and Licenses 4,620
Miscellaneous Expense 5,450
Uncollectible Accounts Expense 3,000
Depreciation Expense – Office Equipment 15,000
Depreciation Expense -|Office Furniture 4,375
Interest Expense 750 151,745
Net Income P 64,075

Statement of Financial Position

 is a formal statement showing the financial position of an enterprise as of a particular or specific date.

 represents the three elements of financial position: assets, liabilities and equity.
 has the following sections:

A. ASSETS are classified into two:

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 1. Current Assets -
 includes cash and cash equivalents which are held for trading purposes or the short-term and
expected to be realized, sold or consumed in one year or one operating cycle.

a) Cash and cash equivalents - includes cash on hand, petty cash fund and cash in banks.
b) Trade and other receivables - includes accounts receivables, notes receivables, interest
receivables, etc.
c) Prepaid expenses

2. Non-current Assets - all other assets not classified as current.

a) Property Plant and equipment

b) Long term investment
c) Intangible assets
d) Other non-current assets

B. LIABILITIES -are present obligations of an enterprise arising from past transactions or events,
the settlement of which is expected to result in an outflow from the enterprise
of resources embodying economic benefits.

Liabilities are classified into two:

1. Current liabilities
 obligations which are expected to be settled in the normal course of the enterprise’s operating cycle,
and obligations which are due to be settled within one year from the balance sheet date. Line items
under current liabilities are:

a. Trade and other payables - includes accounts payable, notes payable, interest payable, salary
payable, income tax payable, unearned revenues, etc.
b. Notes Payable - short term (current portion of long-term notes
c. Other current liabilities

2. Non-current liabilities
 includes all other liabilities not classified as current. Line items under non-current liabilities are:

Non-current portion of long term debts, such noted payable, mortgage payable, bonds payable,
a.
etc.
b. Long term obligations to company officers
c. Long term deferred revenues
C. Equity
 is the residual interest in the assets of the business after deducting all its liabilities. This is also referred
to as “net assets”. This is referred to as “Owner’s Equity”.
FORMS OF STATEMENT OF FINANCIAL POSITION (BALANCE SHEET):

a. Account Form
 the balance sheet presentation follows that of an account, meaning, the assets are shown on the left
side and the liabilities and equity on the right side of the balance sheet.

c. Report Form

 this form sets forth the three major sections in a downward sequence of assets, liabilities and equity.

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Statement of Financial Position
Report Form
SUPER CLEANERS ENTERPRISES
Statement of Financial Position
December 31, 2021

A S S E T S
Current Assets
Cash P 140,000
Accounts receivable P 50,000
Less: Allowance for Doubtful Accounts 5,000 45,000
Notes Receivable 10,000
Interest receivable 200
Unused Supplies 4,500
Prepaid Rent 6,000
Total Current Assets P 205,700

Non-current Assets
Cleaning Equipment P 75,000
Less: Accumulated depreciation - Office
Equipment 15,000 60,000
Office Furniture P 35,000
Less: Accumulated Depreciation – Office
Furniture 4,375 30,625 90,625
P 296,325

LIABILITIES AND OWNER’S EQUITY

Liabilities
Accounts Payable P 40,000
Notes Payable 15,000
Interest Payable 750
Salary Payable 5,000
Utilities Payable 3,500
Unearned Service Income 3,000 P 67,250

Owner’s Equity
A. Malinis, Capital, December 31, 2021 229,075
Total Liabilities and Owner’s Equity P 296,325

THE STATEMENT OF CHANGES IN OWNER’S EQUITY

SUPER CLEANERS ENTERPRISES

Statement of Changes in Owner’s Equity
Year ended December 31, 2021

A. Malinis, Capital , January 1, 2021 P 170,000

Add: Net income 64,075
Total P 234,075
Less: A. Malinis, Drawing 5,000
A. Malinis, Capital, December 31, 2021 P 229,075

CLOSING ENTRIES

At the end of the year, the balances of the nominal or temporary accounts (income, expenses and drawing ) are
closed or transferred to a summary account – Income Summary or Income and Expense Summary and then the
balance of Income Summary account is closed or transferred to capital account.
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Nominal and Real Accounts

Nominal accounts –
 known as temporary accounts and are income statement accounts - income, expenses and
withdrawal account.
 The amounts of these accounts apply only to the current accounting period
 These accounts are closed to capital account at the end of the period.

Real accounts
 Known as permanent accounts and are statement of financial position accounts – assets, liabilities
and capital account.
 Balances of these accounts are forwarded to the next accounting period

Steps in Closing the Temporary (Nominal) Accounts

1. Close the income accounts to Income Summary account

 income accounts have credit balances before closing entries. To close income accounts, an entry
debiting each income account in the amount of each is made and for the total Income Summary
account is credited. To close means bring the income accounts to zero balance.

2. Close the expense accounts to Income Summary account

 expense accounts have debit balances before closing entries. To close expense accounts, an entry
crediting each expense account in the amount of each is made and for the total Income Summary
account is debited. To close means bring the expense accounts to zero balance.

3. Close the Income Summary account

 After posting the closing entries ( 1 and 2), the balance of the Income Summary account will be equal
to the profit of loss for the period. If Income Summary account has a credit balance, it represents a
profit and a loss if it has a debit balance. Regardless of the nature of its balance, Income Summary
account must be close to capital account. (Bring the Income Summary account to zero balance after
closing to capital account.

4. Close the withdrawal account

 Close the drawing account to capital account.

Closing Entries (Super Cleaners)

2021
Dec. 31 Service Income P 215,620
Interest Income 200
Income Summary P 215,820
To close income accounts to income
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 Summary.

31 Income Summary 151,745

Salary Expense 41,500
Supplies Expense 26,500
Insurance Expense 1,200
Rent Expense 18,000
Utilities Expense 31,350
Taxes and Licenses 4,620
Miscellaneous Expense 5,450
Uncollectible Accounts Expense 3,000
Depreciation Expense – Office Equipment 15,000
Depreciation Expense -|Office Furniture 4,375
Interest Expense 750
To close Expense accounts to income summary

31 Income Summary 64,075

A. Malinis , Capital 64,075
To close Income Summary to Capital
account

31 A. Malinis, Capital 5,000

A. Malinis , Drawing 5,000
To close drawing account to capital account/

Post-Closing Trial Balance

 Final trial balance
 Verifies that all the debits equal the credits in the trial balance.
 The trial contains only balance sheet accounts (real accounts) – assets, liabilities and ending capital
account.
 Does not include income, expense and drawing accounts because these accounts have zero
balances.

SUPER CLEANERS ENTERPRISES

Post-Closing Trial Balance
December 31, 2021

Debit Credit
Cash P 140,000
Accounts receivable 50,000
Allowance for Uncollectible Accounts P 5,000
Notes Receivable 10,000
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 Interest Receivable 200
Supplies on hand 4,500
Prepaid Rent 6,000
Cleaning Equipment 75,000
Accumulated depreciation – Office Equipment 15,000
Office Furniture 35,000
Accumulated depreciation - Office Furniture 4,375
Accounts Payable 40,000
Notes Payable 15,000
Interest Payable 750
Salary Payable 5,000
Utilities Payable 3,500
Unearned Service Income 3,000
A. Malinis, Capital ___________ 229,075
P 320,700 P 320,700
REVERSING ENTRIES
 Some year-end adjustments are reverse at the beginning or the first day of the next accounting period.
 Reversing entries are optional and made to simplify the recording of regular transaction in the next
accounting period.
 A reversing journal entry is the exact opposite of the related adjusting entry made at the end of the
accounting period.
 Only adjusting entries that set real accounts or recognize real accounts – assets or liability accounts are
reversed.
 Reversing Entries are made for year-end adjustments that set or recognize real accounts – assets or
liability accounts .
 The following adjusting entries are to be reversed:
1. accrued income
2. accrued expenses
3. Prepaid expense using expense method
4. Unearned income using income method

 The following adjusting entries are not to be reversed:

1. estimated doubtful accounts or bad debts expense
2. depreciation of property and equipment
3. prepaid expense using asset method
4. deferred income or unearned income using liability method.

 Example: (Using the adjusting entries for Super Cleaners):

Reversing Entries
Solution

GENERAL JOURNAL

Date Particulars PR Debit Credit

202
2 1 Interest Payable P 750
Jan.

20
 Interest Expense P 750
To reverse adjustment for accrued
interest on notes payable.

Rent Expense 6,000

Prepaid Rent 6,000
To reverse adjustment for prepaid rent.

Salary Payable 5,000

Salary Expense 5,000
To reverse adjustment for accrued
salaries.

Unearned Service Income 3,000

Service Income 3,000
To reverse adjustment for unearned
income.

Utilities Payable 3,500

Utilities Expense 3,500
To reverse adjustment for unpaid light
bills

Interest income 200

Interest receivable 200
To reverse adjustment for accrued
interest.
on notes receivable

Reversing Entries Example Explained:

Adjusting Entries for Super Cleaners Enterprises

GENERAL JOURNAL

Date Particulars PR Debit Credit

2021
Dec. 31 (1) Uncollectible Accounts Expense P 3,000
Allowance for Uncollectible Accounts P 3,000
Provision for estimated uncollectible
accounts
 Not to be reversed
(2) Depreciation Expense – Cleaning Equipment 15,000

Accumulated Depreciation – Cleaning 15,000

Equipment
Provision for depreciation.
 Not to be reversed

(3) Depreciation Expense – Office Furniture 4,375

Accumulated Depreciation – Office 4,375
Furniture
Provision for depreciation.
 Not to be reversed

(4) Interest Expense 750

Interest Payable 750
Accrued interest on notes payable.
 to be reversed

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 (5) Supplies Expense 26,500
Supplies on hand 26,500
Supplies unused.
 not to be reversed

(6) Prepaid rent 6,000

Rent Expense 6,000
3-months rent paid in advance.
 to be reversed

(7) Salary Expense 5,000

Salary Payable 5,000
Accrued salaries.
 to be reversed

(8) Service Income 3,000

Unearned Service Income 3,000
Unearned income.
 to be reversed

(9) Utilities Expense 3,500

Utilities Payable 3,500
Unpaid light bills
 to be reversed

(10) Interest Receivable 200

Interest Income 200
Accrued interest on notes receivable.

 to be reversed

Analysis:

This adjusting entry is to be reversed at the beginning of the next accounting period:

(4) Interest Expense 750

Interest Payable 750
Accrued interest on notes payable.
 to be reversed

A, Reversing entry was prepared:

The Reversing entry would be:

Interest Payable 750

Interest Expense 750
To reverse adjustment for accrued
interest on notes payable.

Interest Expense is a nominal account and closed to Income Summary at the end of the period, while Interest
Payable is a real account and the balance is forwarded to the next accounting period. Using T-accounts,
analysis of the AJE and RE would show the following balances after posting the reversing entry:

Interest Expense Interest Payable

12/31 AJE 750 12/31/21 CJE 1/1/22 RE 750 12/31/21AJE 750
750
1/1/22 RE
750

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It can be observed that:
1. As of December 31, 2021:
a. Interest Expense account has zero balance after posting the closing entries (CJE)
b. Interest payable account has a credit balance of P 750.

2. On January 1, 2022, after posting the Reversing entry:

a. Interest expense account has a credit balance of P 750.
b. Interest payable has zero balance.

3. the credit balance of Interest expense account as of January 1, 2022 represents interest incurred and an
expense of last accounting period and to be paid this current period but it is not an expense of the
current period.

4. When payment is made, the total amount paid for interest is recorded by debiting Interest expense.

Ex. On January 15, 2022, the promissory note was paid: principal, P 10,000 and the interest of P 1,250
( this includes the accrued interest on notes payable as of December 31, 2021).
The entry would be:

202
2
Jan. 15 Notes Payable 10,000
Interest Expense 1,250
Cash 11,250
Payment of note.

5. when entry to record payment is posted to the general ledger, it can be observed that the interest
expense incurred for 2022 is only P 500.

Interest Expense Interest Payable

12/31 AJE 750 12/31/21 CJE 1/1/22 RE 750 12/31/21AJE 750
750
1/1/22 RE
750
1/15/22 1,250
500

B. If no reversing entry was made: On January 1, 2022,

a. Interest payable account has a balance of P 750.
b. Interest expense account has zero balance
c. then the entry to record payment would be:

202
2
Jan. 15 Notes Payable 10,000
Interest Expense 500
Interest Payable 750
Cash 11,250
Payment of note.

General ledger shows:

Interest Expense Interest Payable

12/31 AJE 750 12/31/21 CJE 1/15 2022 12/31/21AJE 750
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 750 750

1/15/22 500

It can be observed: that the total amount of interest paid of P 1,250 cannot be debited to Interest expense.

Note: Reversing entries are optional.

Lesson 6 - Preparation of Financial Statements and Completing the

Accounting Cycle for Service Business (closing Entries,
Post Closing Trial Balance and Reversing Entries)

Activity:

Problem 1 – Using Problem 2 ( Bala Legal Services – Lesson 5 activity)

REQUIRED: Prepare: 1. Financial Statements

2. Closing Entries
3. Post Closing Trial Balance
4. Reversing Entries

Problem 2:
The following account balances appear in the books of MATIBAY REPAIR SHOP as of the end of the year
December 31, 2021:
Matibay Repair Shop
AdjustedTrial Balance
December 31, 2021
Debit Credit
Cash on hand P 6,500
Cash in bank 30,500
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 Accounts Receivable 52,300
Allowance for bad debts P 5,230
Notes Receivable 15,000
Interest Receivable 500
Supplies on hand 2,500
Prepaid Advertising 3,500
Repair Equipment 85,000
Accumulated Depreciation 12,500
Furniture and Fixtures 32,000
Accumulated depreciation 3,500
Accounts Payable 58,500
Notes Payable 10,000
Interest Payable 500
Salary Payable 1,500
Matibay A. Co, Capital 71,620
Matibay A. Co, Personal 15,000
Service Income 183,350
Supplies Expense P 35,200
Rent Expense 18,000
Salary Expense 25,000
Advertising Expense 3,500
Utilities expense 5,600
Depreciation Expense – repair equipment 8,500
Depreciation expense – furniture and fixtures 1,600
Bad debts Expense 2,500
Taxes and licenses 4,000
Interest Expense 2,500
Interest income _________ 2,500
P 349,200 P 349,200

REQUIRED: Prepare: 1. Financial Statements

2. Closing Entries
3. Post Closing Trial Balance

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