Office supplies were purchased for cash on December 2, 2020 for P12,390. The supplies were to be used over the next several months. A physical inventory showed that P3,585 of the supplies were on hand on December 31, 2020. Show the entries for the purchase using the asset method and the expense method. What adjusting entries would be necessary on December 31 if financial statements are prepared at that time? ASSET METHOD EXPENSE METHOD Office supplies 12,390 Office supplies expense 12,390 Cash 12,390 Cash 12,390 Purchased supplies. Purchased supplies. Office supplies expense 8,805 Office supplies 3,585 Office supplies 8,805 Office supplies expense 3,585 12,390 – 3,585 Unused portion.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Exercise 3. Provide the entries for the below independent transactions.
1. Office supplies were purchased for cash on December 2, 2020 for P12,390. The supplies were to
be used over the next several months. A physical inventory showed that P3,585 of the supplies were
on hand on December 31, 2020. Show the entries for the purchase using the asset method and the
expense method. What
are prepared at that time?
ASSET METHOD EXPENSE METHOD
Office supplies 12,390 Office supplies expense 12,390
Cash 12,390 Cash 12,390
Purchased supplies. Purchased supplies.
Office supplies expense 8,805 Office supplies 3,585
Office supplies 8,805 Office supplies expense 3,585
12,390 – 3,585 Unused portion.
2. Assume that rent of P57,600 was paid on September 1, 2020, to cover a one-year period from that
date. Prepare the
December 31, 2020, using both the asset method and the expense method.
ASSET METHOD EXPENSE METHOD
Prepaid rent 57,600 Rent expense 57,600
Cash 57,600 Cash 57,600
Payment of rent. Payment of rent.
Rent expense 19,200 Prepaid rent 38,400
Prepaid rent 19,200 Rent expense 38,400
57,600 x 4/12 57,600 x 8/12
Module 4 9- NAB
3. Assume that a company acquires a building on January 1, 2020, at a cost of P1,410,000. The building
has an estimated useful life of 20 years and an estimated residual value of P150,000. What is the
adjusting entry needed on December 31, 2020 to record the
Depreciation expense- building 63,000
(1,410,000 – 150,000)/ 20
4. Amiable Company incurs salaries at a rate of P4,200 per day. The last payday in January is Friday,
January 27 and no work for Saturday and Sunday. Give the adjusting entry on January 31.
Salaries expense 8,400
Salaries payable 8,400
4,200 x 2
5. On June 1, 2020, ABC Company received a total P14,400 as payment in advance of a one-year
subscriptions to a monthly magazine, beginning June 1, 2020. Give the entry to record (a) receipt of
subscription fees and (b) to adjust the accounts on December 31, 2020 using the liability and revenue
method.
LIABILITY METHOD REVENUE METHOD
Cash 14,400 Cash 14,400
Unearned subscription 14,400 Subscription revenue 14,400
Received subscriptions. Received subscriptions.
Unearned subscription 8,400 Subscription revenue 6,000
Subscription revenue 8,400 Unearned subscription 6,000
14,400 x 7/12 14,400 x 5/12
6. Liza and Enrique, a law firm, performed legal service in late December 2020 for clients. The
P42,000 will be billed in January 2021. Give the necessary adjusting entry on December 31, 2020 if
financial statements are prepared at the end of the month.
Service revenue 42,000
To record earned legal service.
7. Assume that on December 31, 2020, the end of the company’s accounting period, the company has
outstanding Accounts Receivable of P400,000. The company estimates that 5% of these receivables
might not be collected.
a. Assume that there is no beginning balance for Allowance for Uncollectible Accounts, what is the
adjusting entry?
Uncollectible Accounts Expense 20,000
Allowance for Uncollectible Accounts 20,000
400,000 x 5%
b. Assume that there is P12,000 (credit) balance for Allowance for Uncollectible Accounts, what is
the adjusting entry?
Uncollectible Accounts Expense 8,000
Allowance for Uncollectible Accounts 8,000
(400,000 x 5%) – 12,000
c. Assume that there is P12,000 (debit) balance for Allowance for Uncollectible Accounts, what is
the adjusting entry?
Uncollectible Accounts Expense 32,000
Allowance for Uncollectible Accounts 32,000
(400,000 x 5%) + 12,000
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