APPLICATION OF ACCOUNTING PRINCIPLES
1. Cinderella Sy is engaged in buying and selling of merchandise. Most of her transactions are done online
although she also caters walk-in customers. At the end of the year December 2020, her
accountant told her that her business is doing well. In fact, it made a profit of 100,000.00. The following data are taken from the records
of the business:
Sy, Beg. Capital 200,000.00
Total income 300,000.00
Total Expenses 200,000.00
Sy, Drawing 150,000.00
The Balance Sheet and Income Statement are presented to her. The
accountant explain to here the Owner’s Equity section and told her that her
capital is decreased by 50,000.00 at the end of the year. Cinderella is confused why her capital
investment decreased by 50,000.00 when the business is making a profit. She did not understand why the profit of
100,000.00 resulted to a decrease in her capital investment at the end of the year. Cinderella now seeks for your expertise as she learned that you are studying Principles of Accounting, how do you explain to her the decreased in her capital investment at the end of the
2. A company buys an Office supplies on credit. Give the effect of this transaction to the Balance Sheet and Income statement.
3. How can a company avoid bad debts?
4. Why do we need to provide for allowance for
doubtful accounts or bad debts or write them off? Explain.
5. Determine the effect on the Financial Statements if the following adjustments are not prepared at the end
of the calendar year. Justify your answer.
a. No physical count of merchandise inventory at the end of the year was conducted thereby the amount reflected in the ending
balance cannot be ascertained.
b. Employees’ salaries remain unpaid at
the end of the year.
c. Depreciation expense is erroneously
recorded at 200,000.00 instead of 100,000.00
d. Personal drawing by the owner
amounting to 50,000 was not recorded.
e. Paid rent on the office space being used. Total contract price for 1 year is
12,000.00. The whole amount was debited to Prepaid expenses on the date of payment November 1, 2023.
The company follows the calendar year ending December 31, 2023.
f. Service has been rendered amounting
to 5,000 to a customer but the same is not yet collected at the end of the
g. A client paid the company 50,000 at the beginning of the year representing subscription for 1 year. It was taken up
by the accounting department as credit to subscription income account.
h. Bad Debt is estimated to be 10,000 and is certain that it cannot be collected since the debtor absconded.
i. Electricity is not yet paid at the end of the calendar year.
j. Cash advance granted to employees were not recorded.