Basic Accounting

Exercise 1
I. True/False

_____ 1. The concept that accounting is a language of business relies on the accounting service to
convey the true meaning of business condition through financial reports.

_____ 2. Accounting can serve not only as the language but also as the eyes of the business.

_____ 3. The planned process to accumulate and store financial information is managerial accounting.

_____ 4. As a rule, no transaction is to be recorded in the books of account unless supported by source
document.

_____ 5. The journal is the book of original entry and the ledger is the book of final entry.

_____ 6. No real account is reported in the Statement of Comprehensive Income.

_____ 7. The accounting process in the accounting cycle involves the following: Identifying, Measuring
and Communicating.

_____ 8. To get the annual depreciation using straight-line depreciation method, the computation will be
Acquisition Cost divided by the Useful Life of the Asset.

_____ 9. Economic estimates are not recorded in the books of accounts because every business activity
should be supported with proper documentation.

_____ 10. Matching principle prescribes that a company must record its expenses incurred to generate
the revenue reported.

II. Multiple Choice

_____ 11. Practical rule in accounting which dictates the significance of an item to affect the evaluation,
decision and fairness of the financial statements.

a. Materiality b. Conservatism
c. Neutrality d. Relativity

_____ 12. Economic substance of transactions and events are usually emphasized when economic
substance differs from legal form

a. Form over substance b. Economic value

c. Substance over form d. Conservatism

_____ 13. The desire to exercise care and caution when dealing with uncertainties in the measurement
process.

a. Materiality b. Completeness
c. Consistency d. Prudence
_____ 14. It means that financial information must available or communicated early enough when a
decision is to be made.

a. Materiality b. Timeliness
c. Faithful representation d. Relativity

_____ 15. The enhancing qualitative characteristics of financial information are

a. Comparability and understandability

b. Verifiability and timeliness
c. Comparability, understandability and verifiability
d. Comparability, understandability, verifiability and timeliness

_____ 16. When information about two different entities engaged in the same industry has been prepared
and presented in similar manner, the information exhibits the enhancing qualitative characteristic of

a. Relevance b. Comparability
c. Faithful representation d. Consistency

_____ 17. Which of the following is not one of the four basic financial statements?

a. Statement of Comprehensive Income

b. Statement of Financial Position
c. Statement of Changes in Owner’s Equity
d. Statement of Retained Earnings

_____ 18. It is a schedule the brings discrepancies of the cash records of the depositor and the
depository bank into harmony.

a. Cash flows schedule b. Bank statement

c. Cash account schedule d. Bank reconciliation

_____ 19. It is the accounting process of assigning peso amounts to the reportable transactions and
events.

a. Communicating b. Recording
c. Measuring d. Identifying

_____ 20. Which of the following is not finally closed to the capital account at the end of each accounting
period?

a. Owner’s Drawings b. Interest Expense

c. Professional Fees d. Accrued rent income
 III. Problem Solving
Airra Abalos started Abalos Co., and began operations on September 1. Airra Co. completed the following
transactions during the first month of operations:

May 1 A. Abalos invested P350,000 in the company.

1 The company rented a furnished office and paid P75,000 for May’s rent.
3 The company purchased P50,000 of office equipment on account.
5 The company paid P15,000 for this month’s cleaning services.
8 The company provided consulting services for a client, immediately collected P100,000
cash.
12 The company provided consulting services for a client on credit, P60,000.
15 The company paid P20,000 for assistant’s salary for the first half of the month.
20 Received P60,000 cash payment for services rendered on May 12.
22 Provided P45,000 consulting services on credit.
25 Received partial payment of P22,500 for services rendered on May 22.
28 Paid assistant P20,000 for the second half of the month.
30 Paid P5,000 for this month’s telephone bill.
30 Paid P3,000 for this month’s utilities.
31 A. Abalos withdrew P10,000 cash from the company for personal use.

Required:

a. The journal entries for the transactions above.

b. Prepare the trial balance for the month of May.