Adjusting Entries

After the preparation of unadjusted trial balance is the recording of internal events in the general journal and the posting to the ledgers.

These transactions do not involve exchanges with other entities, thus are not initiated by source document.

These transactions are recorded at the end of accounting period before the preparation of financial statements.

These transactions are the so-called adjusting entries. These entries are made to implement the accrual accounting model which means these entries satisfy the revenue recognition and matching principle.

Adjusting Entries help ensure that all revenues earned during the period are recognized in that period regardless when the cash is received.  Also, they enable the entity to recognize all expenses incurred during a period, regardless when cash is paid.

Consequently, the Income Statement of the period reflects a more complete picture of the company's performance.  The Statement of Financial Position presents a more complete assessment of assets and liabilities.

Adjusting Entries maybe thought of as a method of bringing the financial information of the entity up-to-date before preparing the financial statements.

The following are the basic adjusting entries:

• Prepayments or deferrals

• Precollections

• Accruals

• Estimates (depreciation and amortization, estimated uncollectible accounts)  

• Ending Inventories, if applicable         

Researched by

Solutions for Exercises on Value Received and Value Parted With - Part 1

Solutions for Exercises on Value Received and Value Parted With - Part 1

Exercises on Value Received and Value Parted With - Part 1

Exercises on Value Received and Value Parted With - Part 1

Transactions 
1.  Investment of money and computer set by the owner, Ms. Leni Esguerra

2.  Ms. Esguerra purchases tables and chairs on cash basis.

3.  Ms. Esguerra purchase a business vehicle on credit with downpayment using check

4.  Purchase of lot on credit (promissory notes) with downpayment

5.  Paid in cash the the purchased vehicle on credit

6.  Payment of promissory notes with interest

7.  Rendered services to customer on credit with downpayment

8.  Rendered services to customer on credit with dowpayment. Customer issued written promise to pay

9.  Collection of receivables

10.  Collection of promissory notes with interest

11.  Paid salaries to employees

12.  Payment of rent

13.  Withdrawal of cash by the owner for personal use

14.  Withdrawal of laptop by the owner for personal use

Required :

a.  What are the value received and value parted with for each transactions.
b.  What are the account title to be used for the value received and value parted with.
c.  What is the accounting element affected for the value received and value parted with.

Click here for the solution / answer

Nature of a Service or Servicing Business

Sole Proprietorship

A sole proprietorship business is registered at Department of Trade and Industry or DTI (for Philippines only).  A person contemplating to register a sole proprietorship has to accomplish a DTI Business Name Application Form and submit such form to DTI office and pays the corresponding registration fees and documentary stamps. Then, claim on the date due the Business Name Certification from DTI.

Service or Servicing Business

Entities engaged in providing services for a profit is said to be in a Service Business or Servicing Business.

The primary product this business sells is the "services" it offers. Service Business has no physical product to sell to clients or customers.  Those in this business normally perform or render services which aim to assist or facilitate the work of their clients or customers in exchange for a fee.

Small service business examples are laundry shop, barber shop, beauty parlor, repair shop, etc.

For big servicing business examples are law firms, accounting firms, transportation service, educational institutions, financial institutions, etc.

Operating Cycle of a Service Business

Summary of Common Forms of Values Received and Value Parted With

Summary of Common Forms of Values Received and Value Parted With

1. Thing of Value (maybe a form of money or property)

2. Hire of Services or Render of Services

3.  Use of Property

4.  Promise to Pay

5.  Cancellation of Promise to Pay

6.  Implied Promise to Safeguard Proprietary Interest

7.  Reduction of Responsibility to Safeguard Proprietary Interest

DTI Business Name Application Form

Dti Business Name Application Form Sole Prop Source: http://dtincr.ph/downloads.php

How to Apply for DTI Business Name Registration:

1. Download the application form here : http://dtincr.ph/downloads.php

2.  Accomplish the form

3. Submit to a DTI office and pay corresponding fee

4. Claim the DTI Certification

Source Document Sample : Check

The image is a sample of a check.

Normally, it is more convenient for business owners to issue checks when paying for safer transactions and easy tracking of transactions relating to disbursements.

A check is a draft upon a bank and it is payable on demand, signed by the maker (drawer), containing an unconditional promise to pay a certain sum of money to the order of the payee.

Source Document Sample : Official Receipts

Official Receipt is a document which serves as an evidence or proof of payment.  When, a company issues official receipt, the company acknowledges that it received money in exchange of the good it sold or service it rendered. 

This is an example of manual Official Receipt.

While, this is an example of machine-generated Official Receipt.

JE for Initial Investment or Capital Contribution of a Proprietor

Assume that on June 1, 20x2, Alec A. Agustin set-up his own business which is engaged in trucking rental and services. He named his sole proprietorship business as  AAA Trucking Services Company.  His initial investments are as follows:

Business transactions of a Service Business and Journalizing the transactions in a two-column journal or general journal

Business transactions of a Service Business and Journalizing the transactions in a two-column journal or general journal 

Common business transactions which are involved in a Service Business of a Sole Proprietor :

• Initial Investment
• Changes in Assets
• Changes in Liabilities
• Changes in Capital
• Changes in Income
• Changes in Expenses
• Withdrawals of owners

Note that since each transaction has dual-effects, we can not avoid to show only one effect in one transaction and the two-fold effects will be discussed in each and every transactions.

Initial investment

The investment of the owner maybe in the form of cash or properties. 

When investment is in the form of cash, such capital must be recorded at the monetary value of cash. 

While, investments in non-cash form shall be valued at the fair market value of the non-cash asset.  PAS No. 16 defines that fair market value as the current amount by which an asset can be bought in the market. 

Illustrative example

• Assume that on June 1, 20x2, Alec A. Agustin set-up his own business which is engaged in trucking rental and services. He named his sole proprietorship business as  AAA Trucking Services Company...read more

Changes in Assets and Liabilities 

Changes in Assets happens when

• one form of asset is acquired through the use of another form of asset, or 
• increase or decrease of asset is a result of business operation, or 
• loss of asset, etc.

While, changes in liabilities occurs when

• one form of liability is converted into another form of liability, or 
• increase in liability by means of borrowings or unpaid bills, or
• decrease in liability through payments, cancellation of liability by the creditor, etc.

Following are illustrative examples of changes in assets and liabilities:

Increase in Asset and Decrease in Asset

• On June 3, 20x2, AAA Trucking Services Company bought for P890,000.00 cash a  Toyota Innova to be used as company service vehicle...read more

• On June 4, 20x2, AAA Company received cash, P250,000.00, for the sale of its old delivery truck used in the business...read more

• On June 19, 20x2, AAA Trucking Services Company received P15,000.00 cash from KES Engineering Services, as full payment of their account with AAA...read more 

• On June 21, 20x2, AAA Trucking Services Company sold a used 3-in-1 printer, P1,500.00 to Emy Cruz which she promised to pay at the end of the month...read more 

Increase in Asset and  Increase in Liability

• On June 23, 20x2, AAA Company bought a brand new L200 Epson printer, P9,800.00  which the company promised to pay in 10 days...read more 

Decrease in Liability and Decrease in Asset 

• On June 29, 20x2, AAA Trucking Services Company paid cash, P15,000.00 to BS Accounting Firm in full payment of AAA account with BS...read more

Changes in Capital, Income and Expenses

Changes in Capital arises from the following:

• Initial investment or capital
• Additional investment or capital contribution
• Income Transactions (increases capital)
• Expense Transactions (decreases capital)
• Withdrawal of owners

Increase in Asset and Increase in Capital (thru Increase in Income)

• On June 20, 20x2, AAA Trucking Services Company received cash, P45,000.00, from a customer for the 10-day use of its delivery truck ... read more

• On June 18, 20x2, AAA Trucking Services Company presented Bill No. 8888, P280,000.00 to Angel Martin Cakes and Ice Cream Company, a customer, for the delivery and trucking services rendered by AAA which the customer promised to pay in 15 days...read more 

• On June, 8, 20x2, AAA Trucking Services Company sent a bill, P15,000.00, to KES Engineering Services for the hire of delivery truck which they promised to pay on 20th of the month...read more

Decrease in Capital (thru Increase in Expense) and Decrease in Asset 

• On June 20 20x2, AAA Trucking Services Company received a bill, P12,000.00, of Tenzai Real Estate & Development Company, owner of the big-sized lot AAA Co. uses to park its delivery trucks, covering the rental for the month, which AAA promises to pay at the end of the month...read more

• On June 25, 20x2, AAA Trucking Services Company received Bill No. 2222, in the amount of P15,000.00 from BS Accounting Firm, for the tax services rendered which it promised to pay at the end of month...read more

• On June 30, 20x2, AAA Trucking Services Company paid cash, P10,000.00, to B & M Property Group Company, in payment for the month on the rental of shop space occupied by AAA Co...read more

Increase in Asset and Increase in Capital (thru additional investment or contribution)

• On June 22, 20x2, AAA Company received cash from Alec A. Agustin, the proprietor, P100,000.00 as additional capital of the business...read more  

• On June 13, 20x2, AAA Company received a second hand elf truck worth P400,000.00 from Alec A. Agustin, the proprietor, for use in the business...read more

Withdrawals of Owner

Decrease in Capital (thru withdrawal by owner) and Decrease in Asset 

• On June 18, 20x2, Alec A. Agustin, the proprietor of AAA Trucking Services Company, took home a laptop worth P35,000.00 for personal his use...read more

• On June 27, 20x2, AAA Company gave P3,000.00 to Alec A. Agustin, the proprietor, for his personal use...read more

Sample Business Transactions, its Analysis and their effects on Accounting Equation

Analyzing and accounting for business transactions

Analyzing and accounting for business transactions, one has to acquire ability to recognize the dual effects of each transaction has on the accounting equation.

In analyzing business transactions, the bookkeeper must have an ample knowledge of the varied forms of values in the business transaction. And, identify the form of values received and the form of the values parted with. Then, being able to assign the account title for that form of value received or parted with; know when to debit or credit the value received or parted with; and discern the effects of business transactions in the accounting elements.

In accounting business transactions, the main task of a bookkeeper is to be able to journalize entries--identify, measure and record the business transactions and events transpired during an accounting period. Before a bookkeeper can journalize entries, he must obtain skills in analyzing the transactions.

In bookkeeping, the ultimate aim in recording transactions and events is to group the amounts of every value of similar form in order to determine the total of each classified form of value for a particular length of time.

Each value is classified according to accounting elements, namely, assets, liabilities, equity, revenue and expenses. It is important to know when to classify the expenditure whether an asset or expense.

Also, it is important to know the effects of expenses in the capital and the effects of income in the capital.

In short, below is a list of knowledge a bookkeeper must bear in mind when analyzing and accounting for business transactions:

• Varied forms of values (received and parted with) in the business transactions
• Debit the value received and Credit the value parted with
• Account and Account Titles
• Effects of business transactions in the accounting elements and accounting equation
• Expenditure is either classified as an asset or as an expense
• Effects of expenses in the capital/proprietorship
• Effects of income in the capital/proprietorship
• Journalizing and Journal Entries
• Analyzing and Journalizing