Completion of the Accounting Cycle for Service Entity

Basic Accounting Cycle

1. CHAPTER 4
COMPLETION OF THE
ACCOUNTING CYCLE
(SERVICE ENTITY)

2. OBJECTIVES
Explain why adjusting entries are needed
Identify the major types of adjusting
entries
Prepare adjusting entries for prepayments
Prepare adjusting entries for accruals
Described the nature and purpose of an
adjusted trial balance

3. OBJECTIVES
Prepare a worksheet
Identify the components of the primary
financial statements
Prepare an income statement, statement
of changes in equity, cash flows statement
and statement of financial position
Describe and prepare closing entries
Prepare a post-closing trial balance
Prepare reversing entries

4. Why adjusting entries are needed
Revenue and expense accounts may relate
to more than one accounting period
Some items are earned or incurred in a
given period but not yet entered into
account
Updating some open accounts at the end
of accounting period

5. Adjusting entries
Journal entries that updates some of the
accounts at the end of accounting period
It affects at least one nominal account and
one permanent account
Recorded in general journal
Posted to the general ledger
Prepare adjusted trial balance
Prepare financial statements

6. Year-end adjustments
Pre payments
Unearned income
Accrued expenses
Accrued income
Depreciation of fixed assets

7. Prepaid expenses
Debits recorded in the books for goods or
services that are not to be used up
currently
Methods
Asset
expense

8. Asset method
An asset account was originally debited
Adjusting entry
Debit -Expense account
Credit –asset account
Remaining Debit balance in asset account
is the amount available to be used in the
future periods

9. Expense method
Expense account is originally debited
Adjusting entry
Debit –asset account
Credit –expense account
The debit balance in expense account is
the amount of expense applicable to the
current period

10. On October 5, Hanz Sanchez paid
P4,500
for three months insurance
premiums.
What is the original journal entry for asset
method?
What is the adjusting entry?
What is the amount of expense for the
current period?
What is the balance of prepaid insurance
as of October 31?

11. On October 5, Hanz Sanchez paid
for three months insurance
premiums for P4,500.
What is the original journal entry for
expense method?
What is the adjusting entry?
What is the amount of expense for the
current period?
What is the balance of prepaid insurance
as of October 31?

12. Unearned income or ?
Are credits recorded in the books for cash
received in advance from customers prior
to delivery of goods or performance of
services
Adjusting entry
income to be recognize in the period
income applicable to future period
Methods
Liability method
Income method

13. On Oct 1, the business received P
9,000 from customers for advance
three months payment effective Oct
1
What is the original journal entry for
liability method?
What is the adjusting entry?
What is the amount of income for the
current period?
What is the balance of liability as of
October 31?

14. On Oct 1, the business received P
9,000 from customers for advance
three months payment effective Oct
1
What is the original journal entry for
income method?
What is the adjusting entry?
What is the amount of income for the
current period?
What is the balance of liability as of
October 31?

15. Accrued expense or ?
Refer to expenses incurred by the
business but not paid at the end of the
period
Adjusting entry
Debit -expense account
Credit –liability account

16. The salary every 15
th
is from 26
th
of the
previous month and 10
th
of the current
month, every 30
th
from 11
th
to 25
th
of the
current month. The salary is P250 per day,
assume that there is 30 days in a month.
Adjustment entry
How much is the salary expense adjustment
should be recorded at the end of the
period?
How much is the liability adjustment should
be recorded at the end of the period?

17. Accrued income
Amounts earned but not yet received in
cash or recorded until subsequent period.
Adjusting entry
Debit –asset account
Credit –revenue account

18. The lessor has the practice to collect
rental fee every 10
th
of the month for the
rental of the prior month amounting to
P5,000
What is the amount of income that should
recorded at the end of the month?
What is the adjusting entry at the end of
the month?

19. Depreciation
What are subject for depreciation?
Fixed assets or property, plant, and
equipment and
Tangible assets
Used and owned in business operation
Used more than 1 year
Except land

20. Causes of depreciation
Ages ( physical depreciation)
Inadequacy ( functional depreciation)
Obsolescence ( functional depreciation)

21. Adjusting entry
Debit –depreciation expense
Credit –contra asset account
(accumulated depreciation)

22. Method of depreciation (basic
accounting)
Straight line method
Depreciation expense is equal for each year of
the asset’s useful life
Original cost
Estimated useful life
Salvage or scrap value

23. Formula: depreciation expense
Original cost-salvage value/estimated
useful life
Annual depreciation rate x depreciation
cost
Depreciation rate = annual
depreciation/depreciable cost
or 1/estimated useful life
Depreciable cost=original cost-salvage
value

24. Purchased equipment on August 1,
2012 for P150,000, useful life is 5
year
How much is the depreciation cost?
What is the annual depreciation rate?
How much is the depreciation for august
31, 2012?
How much is the balance of accumulated
depreciation on December 31, 2012?
What is the book value of the equipment
on December 31, 2012?

25. Purchased equipment on August 1,
2012 for P190,000, useful life is 5
year and salvage value of P10,000
How much is the depreciable cost?
What is the annual depreciation rate?
How much is the depreciation for august
31, 2012?
How much is the balance of accumulated
depreciation on December 31, 2012?
What is the book value of the equipment
on December 31, 2012?

26. Purchased equipment on August
31, 2012 for P190,000, useful life
is 5 year and salvage value of
P10,000
How much is the depreciable cost?
What is the annual depreciation rate?
How much is the depreciation for august
31, 2012?
How much is the balance of accumulated
depreciation on December 31, 2012?
What is the book value of the equipment
on December 31, 2012?

27. The effects of adjusting entries on
the FS
Adjustment
Income statement
Revenue
Expenses
Net income
Balance sheet
Assets
Liabilities
Owners’ equity

28. Exercises
4-1
4-3
4-4
4-5
4-6
4-7

29. FINANCIAL STATEMENTS
(Service entity)
INCOME STATEMENT
STATEMENT OF CHANGES IN EQUITY
STATEMENT OF FINANCIAL POSITION
STATEMENT OF CASH FLOWS
NOTES, COMPRISING A SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
AND OTHER EXPLANATORY NOTES

30. FORMAT
HEADING
FOR THE PERIOD –INCOME STATEMENT,
STATEMENT IN CHANGES OF EQUITY,
STATEMENT OF CASH FLOWS
FOR A SPECIFIC DATE –BALANCE SHEET
LISTING OF ACCOUNTS

31. Worksheet
Multicolumn paper used to facilitate
preparation of adjusting entries and
financial statements
It is optional
Working paper

32. Steps in preparing worksheet
prepare unadjusted trial balance
Enter the adjustments in the adjustments
column
Enter and total the adjusted account balances in
the adjusted trial balance
Extend the adjusted trial balance amounts to the
appropriate financial statement columns
Total the income statement column: compute
the net profit or (net loss and complete the
worksheet

33. After each of the given transaction, you are
required to do the following:
a)Reconstruct the original entry
b)Prepare the adjusting entry
1. Bought supplies in cash amounting to
P7,000. Asset account was debited at the
time of purchase. It was ascertained that
P4,500 worth of supplies were on hand at
year-end.

34. 2. Paid the annual insurance premium of
P5,600. A nominal account was debited
upon prepayment. At the end of the
accounting period, P1,200 had actually
expired.
3. Received P8,000 from a tenant
representing advance rental. A liability
account was credited upon receipt of cash.
At the end of the accounting period, P5,000
was actually earned.

35. 4. Prepaid an advertisement for P12,000.
Asset account was debited at the time of
disbursement. At the end of the accounting
period. P8,000 has actually expired.

36. For each of the following cases, prepare the
adjusting entries required for financial
reporting for the year ended December 31,
2013. Assume that prepaid expenses are
initially recorded in asset accounts and fees
collected in advance are initially recorded as
liabilities)

37. 1.one-fifth of the work related to P60,000 cash
received in advance is performed this period.
2.Salaries of P8,000 are earned by employees but not
paid as of December 31, 2013.
3.Depreciation on equipment for 2013 is P16,000
4.The supplies account had a P2,100 debit balance on
December 31, 2010. During 2013, P8,500 of supplies
is purchased. A physical count on December 31,
2013 shows P2,300 of supplies on hand
5.The prepaid insurance account had a P2,400 balance
on December 31, 2010. An analysis of insurance
policies shows that unexpired insurance applicable to
future periods is P600

38. Journalize the appropriate adjusting
entries as of December 31, the end of
fiscal year.
1. trial balance:
Office supplies P5,000
Advertising supplies4,000
Insurance expense 2,400
Additional information
Unused advertising supplies P 3,000
Office supplies consumed 1,400
Un-expired insurance 800

39. Trial balance
Rent revenue P 30,000
Commission revenue 4,500
Additional information
Unearned commission 2,500
Rental earned 10,500

40. Jazz Cuevas started shop on February 1,
2010. The account balances on January 1,
2013 were as follows:

41. Account#
101Cash 19,600
112Accounts receivable 12,000
126Repair supplies 29,000
130Prepaid insurance 2,400
140Repair equipment 80,000
141Accumulated depreciation
equipment
201Accounts payable 10,000
204Salaries payable
208Unearned service revenue8,000
301Jazz Cuevas, capital 60,000
302Jazz Cuevas, withdrawals15,000

42. 310 income Summary
401 Service Revenue 200,000
610Depreciation expense-
equipment
622Salaries expense 52,000
637Rent expense 55,000
640Insurance expense
650Repair supplies expense
670Utilities expense 13,000

43. During January, the last month of the fiscal year, the following
summary transactions were completed:
Jan1 paid rent for January P6,000
5 received P4,600 cash from customers on
account
10 received P18,000 cash for services rendered in
January
15 purchased supplies on account P5,000
20 performed services on account and billed
customer for P5,600
22 paid creditors on account P7,200
24 Cuevas withdrew P2,800 for personal use
26 paid utilities expenses P1,850
28 paid salaries P8,000
30 received P4,000 from customers for services
to be rendered in February

44. Instructions:
1.Enter the balances of each account in the
appropriate balance column of a three-
column account. Write “Balance” in the
explanation section, and place a check
mark (/) in the posting reference column.
2.Journalize the transactions for January.
3.Post from the journal to the general
ledger, extending the balances to the
appropriate balance column after all
posting is completed.

45. 4. Prepare a trial balance as of January 31 on a
10-column work sheet, listing all accounts in
the order given in the ledger. Complete the
work sheet for the fiscal year ended January
31, using the following data
a.Unearned service revenue of P3,500 is
earned
b.Depreciation is P16,000 per year
c.Accrued but unpaid salaries were P7,000
d.The insurance policy is for one year, dated
May 1, 2012
e.On January 31, P11,500 of repair supplies
was on hand

46. 5. Journalize and post the closing entries
6. Prepare a balance sheet and an income
statement using the 10-column work sheet.
7. Journalize and post the closing entries
8. Prepare a post-closing trial balance
9. Prepare a balance sheet, income
statement, and statement of changes in
Owner’s Equity using the following form
a. balance sheet –report form
(vertical)