Actg 5 PDF

Fundamentals of Accounting part 1
1
Analyzing, Recording, Summarizing Business Transactions
Module 005 Analyzing, Recording, Summarizing

Business Transactions
This module covers the following basic/ introductory topics in accounting: an

overview of the accounting process or cycle; business transactions; double-
entry system; accounting elements; accounting equation; t-accounts; rules of
debit and credit; chart of accounts, definition of accounts, and their normal
balances; analyzing and recording business transactions in the general
journal; posting the journal entries to the ledger; preparing the trial balance;
and the simple financial statements..
After studying this module, the students should be able to
1. Use accounting vocabulary (accounting terminologies).
2. Understand the accounting cycle.
3. Explain the double-entry system.
4. Define business transactions and analyze them.
5. Enumerate, define, and understand the accounting elements.
6. Understand the importance of T-accounts and the rules of debit and
credit.
7. Prepare a chart of accounts.
8. Define all the account titles or accounts that will be used in the
accounting process and identify their normal balances.
9. Analyze transactions prior to recording in the journal.
10. Record the transactions in the prescribed document, the general journal.
11. Learn to post the general journal entries to the ledger.
12. Extract a trial balance from the ledger.
13. Prepare the simple financial statements.
Introduction
In the previous modules, we have learned some of the basic accounting concepts and
principles, the basics of business entities, and the financial statements. In this module, we
will start the accounting proper that will lead us to the preparation of financial statements.
For our basic accounting process, we will defer the discussions on the Statement of Cash
Flow which will be given to you in details in another higher accounting course.
Although, technology has brought accounting software, it is a must for all the students to
understand the manual accounting process.
The Accounting Cycle

The accounting process is a cyclic activity for all business organizations who intend to
keep track of their operations. An accounting cycle covers an accounting period.
Accounting period is the length of time covered by the financial statements. Or simply, a
range of time wherein the accounting
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Fundamentals of Accounting part 1 2
Functions are done, consolidated or summarized, and analyzed. Internal and external to a
business entity, accounting period can be monthly, bi-monthly, quarterly, semi-annually, or
annually. The last three periods are the most commonly used accounting period. If
annually or yearly, it can be on a calendar year or fiscal year basis. The accounting cycle
or process is divided into the first three phases of accounting, namely:
1. Recording Phase
2. Classifying and Summarizing Phase
3. Clearing Phase
Recording Phase includes the following steps:

1. Gathering the documents supporting the occurrence of business transactions.
2. Analyzing the business transactions.
3. Recording the business transactions chronologically in the book of original
entry, the general journal or journal. The records are called general journal
entries. Book of original entry because the transactions are first recorded in the
journal.
4. Posting the journal entries to the general ledger or ledger, which is also called
the book of final entry. Book of final entry because the balances in the ledger
will be used to prepare the trial balance, which in turn, will be used to prepare
the final output – the financial statements.
Summarizing Phase consists of the following steps:

1. At the end of the accounting period (we will use annual accounting period),
adjusting entries are prepared or journalized, recorded and posted in the general
ledger to correct or update the account balances.
2. The adjusted account balances in the general ledger will be taken to be listed in
the (adjusted) trial balance. The trial balance will be basis of preparing the
financial statements.
3. The financial statements are prepared
Clearing Phase or the stage of preparing for the next accounting period involves the
following steps:
1. Closing the temporary accounts or the accounts found in the income statement.
Temporary or nominal accounts are closed to a controlling account, the balance
of which will be transferred or close to the appropriate owner’s equity accounts.
Closing entries are also posted in the ledger.
2. Preparing the post-closing trial balance from the accounts with balances in the
ledger after the closing entries are posted.
3. Preparation of the reversing entries (this is optional). Reversing entries are
applicable to those selected adjusting entries so that this will not be duplicated
in the next accounting period.
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To simplify, the steps in the accounting process involve the following:

1. Analyzing the business transactions.
2. Journalizing the business transactions.
3. Posting the journal entries to the general ledger.
4. Preparation of the trial balance.
5. Preparation of the worksheet or spreadsheet (this can be skipped, but for
beginners, this can be a big help)
6. Preparation (Journalizing) of the adjusting entries.
7. Preparation of the adjusted trial balance.
8. Preparation of the financial statements – Income statement and Statement of
Financial Position.
9. Preparation (journalizing) the closing entries.
10. Preparing the post-closing trial balance.
The steps will be fully discussed as we continue with this module and the
succeeding chapters.
Business Transactions and Source Documents

A business transaction is an event or an activity that involves one entity and another
company, this we will call external transaction. There can also be activities within a
business organization which we will term as internal transaction. A business transaction to
gain accounting recognition should involve an exchange of values, usually in quantifiable
forms or can be stated in terms of money. So, for every business transaction, there is a
value received and a value parted with. This exchange of values is also the basis of the
double-entry system of recording transactions.
A business transaction has an effect on the financial position or operations of the business
firm. It affects any of the accounting elements – assets, liabilities, capital, revenue, or
expense.
A business transaction can also be classified as exchange and non-exchange. Exchange
transactions are those with physical exchanges. Examples are buying or purchasing,
selling, collection of receivables, payments of expenses or liabilities. Non-exchange
transactions are activities that do not involve physical exchanges but with changes in
values quantifiable also in terms of money. Examples are depreciation, loss due to fire or
typhoon, etc.
To summarize, transactions to be recognized in the accounting system must have the
following features:
 Transactions should involve the business organization.
 Transactions should be of a financial character, measurable in terms of money.
 Transactions should have a two-fold effect on the accounting elements.
 They should be supported by a source document.
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Source documents will be the basis of recording the transactions in the journal. Examples
of source documents are: Official receipts for cash received, sales invoices, and cash
vouchers when paying in cash, supplier or seller’s invoice, statement of account from
suppliers, promissory notes, and credit or debit memorandum.
The Account and the T-account

An account is a basic tool in summarizing or grouping business transactions in accounting.
It details the changes that occurred in a particular accounting element. Accounts are
grouped in a record called the book of accounts or the ledger.
Accounts are also grouped into three broad categories based on the accounting equation:
Assets = Liabilities + Owner’s Equity (or Capital)
Under Capital, are accounts that affect owner’s equity? These are: Revenue, Expenses, and
valuation or contra accounts.
Revenue and expenses are accounts called nominal or temporary and are shown in the
income statement. They are closed at the end of the accounting period.
Assets, Liabilities, and Owner’s Equity and valuation accounts (such as Accumulated
Depreciation and allowance for doubtful accounts) are called real accounts, reported in
the balance sheet, and remain open permanently as long as the business is not closed.
T-Account
It is easier to make use of T-accounts in analyzing the dual effects of transactions in the
accounting elements. T-account (because it resembles a letter T) I usually used in
classrooms discussions only or in personally analyzing transactions.
The T-account is similar to the ledger. It has two sides:
 Left side or the debit side
 Right side or the credit side
Depending on the account it represents, the two sides of the T-account are used to record
the increases or decreases of the accounts.
Assets Liabilities Owner’s Equity
Expenses Revenue
Note that I only used arrows up and down
To illustrate the increases and decreases
Of the accounts.
If the T-account is for an Asset : Increases are posted on the left side or debit side; while on
the right side or credit side are the decreases in accounts.
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If the T-account is for a liability : Increases are posted on the right side or credit side; while
on the left side or debit side are the decreases .
If the T-account is for Capital : Increases are posted on the right side or credit side; while on
the left side or debit side are the decreases.
If the T-account is for Revenue : Increases are posted on the right side or credit side; while
on the left side or debit side are the decreases
If the T-account is for an Expense : Increases are posted on the left side or debit side; while
on the right side or credit side are the decreases in accounts
The Rules of Debit and Credit can be summarized as follows:
Debit to record Increase in Asset

Decrease in liability
Decrease in Capital or Owner’s Equity
Increase in Expense
Decrease in Revenue
Credit to record Decrease in Asset

Increase in Liability
Increase in Owner’s Equity or Capital
Decrease in Expense
Increase in Revenue
A business transaction has dual effects on accounting elements, so remember that in

recording it there should always be debit and credit entries. That is the essence of the
double-entry system in accounting.
Accounting Equation and the Accounting Elements

The basic accounting equation consists of the three accounting element:
Assets = Liabilities + Owner’s Equity (or Capital)
We have defined already these three accounting elements in module 4 but simplified
definitions will be provided in this section:
Assets are anything that the business owns. They are of economic value to the firm and can
be tangible (have physical form) or intangible (no physical substance such as goodwill,
rights and privileges, trademarks, patents, etc.)
Assets are also grouped into current and non-current. Current assets include cash and other
non-cash assets that reasonably expected to be realized or converted into cash or sold or
consumed within one year from the balance sheet date. Non-current assets (also called
long-term assets or Plant, Property, and Equipment) are assets that acquired or purchased
not to be sold but to be used in the business for a longer period of time, usually more than a
year, to generate revenues.
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(For examples, please see the succeeding sections of this module.)

Liabilities are debts or obligations of the business to creditors. This represents a part of
the interest of the lenders in the total assets of the business.
Liabilities are classified as current or non-current (long-term). Current liabilities are those
obligations which are expected to be settled within a year from the balance sheet date.
Non-current or long-term liabilities are debts which will be paid beyond one year.
Owner’s Equity or Capital pertains to the owner’s claim to the assets of the business.
To simply understand the nature of the accounting equation:
Assets = Liabilities + Owner’s Equity
The assets of the business came from two sources: the creditors and the owners. Example:
Mr. A invested P50, 000 cash in a business. He also bought equipment worth P 20,000 on
credit. The assets of the business are cash of P 50,000 and equipment worth P20, 000 or a
total of P70, 000 and these assets were provided by the owner and the creditor (supplier of
equipment0.\
If we will apply the debit and credit principle, the basic accounting equation will give us
another equation that is, Debit = Credit.
Debits = Credits
This is so, because the normal balance of assets is debit while liabilities and capital are both
credits. Normal balance is usually the balance of an account reflected in the increase side of
an account.
Just to reiterate, a business transaction has a dual effect on the accounting elements, so our
analysis of the business transaction will give us debit and credit entry in the T-account.
(There is neither debit-debit entry nor credit-credit entry.)
Another version is the expanded accounting equation. This shows the effects of revenue,
expense, and drawing to capital. The expanded equation is:
Assets = Liabilities + Capital + Revenues –Expenses –Drawing
Or stated in another way,
Assets + Expenses + Drawing = Liabilities + Capital + Revenues
Chart of Accounts
A chart of accounts is a listing of account titles which a business entity will use in recording
business transactions. Account numbers are assigned to each account title to facilitate the
recording process of business transaction specifically if the accounting system is
computerized.
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For ease of recording, we will assigned account numbers as follows (the company has the
right to choose the numbering scheme of their accounts):
Assets 101 – 199
Liabilities 201 – 299
Capital 301- 399
Revenues 401 – 499
Expenses 501 –599
Other accounts 601- 699
An example of the chart of accounts is presented below and I provided suggested account
numbers, account titles (description of each account will be given separately).
EBC Company
Chart of Accounts
Account
No. Account titles
Assets
Current Assets
101 CAsh on Hand and in Banks
102 Account Receivables
102A Allowance for Doubtful Accounts
103 Notes Receivable -trade
104 Accrued Interest Receivable
105 Unused Supplies
106 Prepaid Expenses
107 Input VAT (Value Added Tax)
Non-Current Assets/Plant-Property & Equipment
108 Land
109 Building
109A Accumulated Depreciation-Building
110 Machinery and Equipment
110A Accumulated Depreciation- Machinery & Equipment
111 Furniture and Fixtures
111A Accumulated Depreciation- Furniture & Fixtures
Liabilities
Current (short-term Liabilities)
201 AccountsPayable-trade
202 Acrrued Interest Payable
203 Notes payable -trade
204 Output VAT
205 Unearned Income
Long-Term Liabilities
206 Notes Payable
207 Bank Loans Payable
208 Mortgage Payable
Account numbers with suffix “A” are contra accounts.
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Owner's Equity
301 EBC, Capital
Withdrawal or Drawing
601 EBC, Drawing
Revenues
401 Service Income
401 Sales
402 Interest Income
403 Other /Miscellaneous Income
Expenses
501 Salaries Expense
502 Supplies Expense
503 Representation Expense
504 Transportation Expense
505 Depreciation Expense- Building
506 Depreciation Expense- Machinery and Equipment
507 Depreciation Expense-Furniture aand Fixtures
508 Repairs and Maintenance
509 Utilities Expense
510 Rent Expense
511 Insurance Expense
512 Doubtful Accounts Expense
513 Interest Expense
514 Taxes and Licenses
515 Advertising Expense
Controlling Account
602 Revenue and Expense Summary
The normal balances of the accounts given in the chart of accounts are as follows:
All Assets Debit
Assets’ contra Accounts (with suffix A) Credit
All Liabilities Credit
All Owners’ Equity/Capital Credit
Drawing Debit
All Revenues Credit
All Expenses Debit
Controlling Account Credit
Normal balances (result of Debit less Credit) are always on the increase side of an account
and are positive values.
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Description of Account Titles

Asset Account Titles
 Cash on Hand and in Banks – This is a record of the cash effects of business
transactions. It includes money (bills and coins) and any medium of exchange that
banks accept at face value (certificates of deposits, checks).
 Accounts Receivable – Trade – Pertains to collectibles from customers arising from
the sale of goods or services in exchange for an oral or implied promise to pay at a
future date.
 Allowance for Doubtful Accounts or Provision for Doubtful Accounts - - This is a
contra account of Accounts Receivables referring to an estimated amount of
receivables that may not be collected from a defaulting customer. This is a reduction
from Accounts Receivable.
 Notes Receivable - Trade – this is also represents collectibles from customers as a
result of selling goods or services on credit but supported by a promissory note, a
written pledge by the customer indicating that he will pay at a certain date the full
amount.
 Accrued Interest Receivable or Unearned Interest Income – this represents the
interest earned but not yet collected or received by the owner. This is determined at
the end of the accounting period by an adjusting entry.
 Unused Supplies - these refers to supplies ( office supplies, repair supplies, etc.) that
are still on hand or not yet consumed and was determined also at the end of the
accounting period and updated by an adjusting entry.
 Merchandise Inventory - these are the unsold merchandise (in a merchandising or
manufacturing type of business) as at the end of the accounting period. This is
determined either by a physical count or by using other methods of estimating at the
end of the accounting period and is also updated by adjustment.
 Prepaid Expenses - are expenses paid in advance and not yet consumed or utilized
or expired as at the end of the accounting period. An adjusting entry will also
determine the amount to be reported.
 Input VAT - (this is prescribed by the BIR). This refers to the taxes resulting from
purchases of goods or services, the balance of which is credited against output VAT.
 Land – pertains to real properties owned or in the name of the business or company.
 Building – This is the physical structure that the business owns and uses as place
where their business operations are conducted.
 Machinery and Equipment - These are assets used by the business in rendering
services or in manufacturing goods to be sold.
 Furniture and fixtures – These refers to tables, chairs, cabinets, furnishings used by
the business. If the furniture and fixtures are not material in amount, these may be
directly charge to Expenses.
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 Accumulated Depreciation - This is a contra account of depreciable assets such as

building, machinery and equipment, furniture and fixtures. This is a reduction from
the value of the concerned asset and was recorded through an adjusting entry at the
end of the accounting period.
Liability Account Titles
 Accounts Payable- Trade - This is a liability arising from trade or business. This is an
indebtedness that arises from purchase of goods or services in the ordinary course
of business.
 Accrued Interest Payable - this pertains to interest already incurred but not yet paid
or not yet due for payment at the end of the accounting period or as of the balance
sheet date. This is updated at the end of the accounting period by an adjusting entry.
 Notes payable – Trade – this is a liability arising from trade or business and covered
by a promissory note, payable within one year from the balance sheet date.
 Output VAT – this account used to accumulate taxes arising from the sale of goods or
services subject to value-added tax. This is prescribed by the Bureau of Internal
Revenue.
 Unearned Revenues - These are income received in advance for goods not yet
delivered to customer or services not yet rendered. This account is also updated or
recognized at the end of the accounting period through an adjusting entry.
 (Name of the Owner), Capital – This refers to the investment made by the owner or
the extent of his interest in the business or his claim over the assets of the business.
This is decreased by Drawing or withdrawal by the owner for personal use and by
net loss incurred by the business and increased by the net income earned by the
business is reflected in the income statement. This capital account title format is
applicable for sole proprietor and for partners in a partnership. In a corporation, the
investment of the owners is called Share Capital.
 (Name of the owner), Drawing – this account refers to the withdrawals made by the
owner against his investment for personal use. We assumed that these withdrawals
are not replaced.
Revenue Account Titles
 Service Income - this account title can be replaced or renamed depending on the
natures of the service type of business. This represents the income earned out of the
normal operations of mainly rendering services of the business to its clients or
customers.
 Sales - This is the revenue title used for merchandising or manufacturing types of
business.
 Interest Income –This account accumulates income derived from extending credits
or loans to third parties or from deposits in banks.
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 Miscellaneous Income – Other income not categorized under the first three income
titles may be recorded under this title but can also be labeled accordingly.
Expense Account Titles
 Salaries Expense – this represents the amount paid for labor or manpower of the
business.
 Supplies Expense - This is the used or consumed portion of the supplies account.
 Representation Expense - Refers to the amount disbursed for taking out other
stakeholders for a treat. It can also include gifts or tokens given to them as long as it
will benefit the business.
 Transportation Expense - This represents transportation allowances given to
employees in attending to a business activity outside the place of work.
 Depreciation Expense - This represents the estimated annual reduction in the value
of the depreciable assets.
 Utilities Expense - This account accumulates disbursements for electricity, water,
communications and other services by utility companies rendered in the business
entity.
 Repairs and Maintenance – This expense account refers to minor or ordinary repairs
of an asset. Major repairs are usually big in amount, capitalized, and at times can
extend the life span of the asset and are not logged in this account.
 Rent Expense – This account refers to expenses incurred in renting a space or place
for business use.
 Insurance Expense – This account pertains to the expired portion of an insurance
policy.
 Doubtful Accounts Expense – This refers to an estimated amount of loss incurred
due to the non-payment of debts by customers/debtors.
 Interest Expense – This is the interest paid on the use of credit arising from loans or
interest –bearing promissory notes.
 Taxes and Licenses – This pertains to all taxes and licenses paid to the government
by the company resulting from the conduct of trade or business.
 Advertising Expense – This is the account debited for all payments for promotions,
ads and other activities that will help the firm in marketing their business and
products.
Controlling Account Title
 Revenue and Expense Summary - also called Profit and Loss Summary, or Income
Summary, this account is used to close the nominal or temporary accounts. And the
balance of this account is closed to owner’s equity account.
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Analyzing and Recording of Business Transactions

In this section of the module, we will do the analysis of the business transactions using a
sole proprietorship, service concern type of business as the setting. The flow of this the first
step and second step in the accounting process will also include the application of the
principles of debit and credit using the T-accounts before the formal recording phase.
Before we start with the sample business transactions, let me give you some important
information about recording business transactions.
 The business transactions will be first recorded in the General Journal or Journal. As
such, the Journal is called the book of original entry.
 The process of recording business transactions in the journal is called journalizing the
transaction or making the journal entry.
 The Journal is a book of accounts where the business transactions are first recorded in
chronological order of events or activities or transactions.
A page of the Journal has five columns:
After writing the heading which is composed of titles: Journal (at the center of the first
row) and Page __ on the right side, aligned with the Journal and on top of fifth column,
the five columns will be labeled as follows:
Column 1 (extreme left) - Date, Year (below the Date)
Column 2 - Accounts and Explanation (or Descriptions or Transactions, or Account
Titles, depending on what the company wants to use) the journal entries will be written
on this column.
Column 3 - Posting Reference (others use the abbreviation P/R or Post. Ref. The old
title is Folio or F is sometimes used. Folio means posting reference or cross referencing.
The Journal Folio or Post. Ref. column is intended for the account numbers in the
ledger where the journal entries are posted. And the Ledger Folio or Post. Ref. column
is intended for writing the page number of the Journal from where the accounts are
recorded.
Column 4 – Debit– This is intended for the debited amounts corresponding to the
debited account title.
Column 5 – Credit - This column is intended for writing the credited amounts that
corresponds to the credited account title.
 An entry or record made in the journal is called a journal entry.

A journal entry with one debit and one credit account is called a simple journal
entry while a journal entry with more than one debit or credit accounts is called
compound journal entry.
A complete journal entry should include the following: date of the transaction, title
of the accounts debited (placed flush left), title of the accounts credited (indented),
the peso amount of the debit (first money column or column 4) and the peso amount
of the credit (right money column or column 5), and a short explanation or
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description of the transaction on the second column below the account title
credited.
Below is an example of Journal:

General Journal Page 1
Date Accounts and Explanation P/R Debit Credit
2017
Jan 2 Cash P 100,000
EBC, Capital P100,000
Initial investment.
4 Laundry Supplies 10,000

Laundry Equipment 50,000
Cash 35,000
Accounts Payable 25,000
Bought laundry supplies and laundry equipment,
paying full amount of the supplies
and 1/2 of the equipment.
Illustrative Problem 5.1 Analysis of Business Transactions to Journalizing –

Sole Proprietorship, Service Concern
Mr. Erwin Cruz started his Wash and Wear Laundry Shop early January of the
current year. His transactions for the month of January are as follows:
Jan 2 Invested P 100,000 cash to begin his laundry business.
3 Purchased Laundry Equipment worth P50, 000 paying ½ and
Issued a promissory note for the balance and laundry supplies,
P10, 000
4 Paid rent of the space used as the shop for three months,
P15, 000.
6 Received P 2,500 for laundry services for walk-in clients.
10 Rendered services for a dormitory, receiving P 2,000 cash
and a promissory note for P 3,000.
15 Performed laundry services to customers on account, P1, 500.
20 Received cash from the customer on January 10.
25 Rendered services to various customers: Cash P 2,000;
On credit, P 1,500.
28 Paid ½ of the balance for laundry equipment.
30 Paid the following expenses: salary of helper, P 5,000;
Utilities, P 1,500.
31 Collected the amount due on January 15.
Required: Prepare individual entries supported by analysis showing the effects of

the transaction on the accounting elements and prepare T-accounts for the accounts
affected. Choose the appropriate account titles to be used.
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Solution:
Jan 2
Transaction analysis There is an increase in asset - Cash of the business and
Increase in owner’s equity- E. Cruz, Capital
Effect on the accounting equation:

Cash, + 100,000 = 0 + E. Cruz, Capital + 100,000
T-accounts:
Cash E. Cruz, Capital
1/2 100,000 1/2 100,000
Journal Entry:
Jan. 2 Cash P100, 000
E. Cruz, Capital P100, 000
Investment.
Jan 3 Transaction analysisThe purchase of laundry equipment increased an asset- Laundry

Equipment; decreased another Asset -Cash and increased
Liability - Notes payable. The purchase of laundry supplies
increased the asset- Laundry Supplies and decreased the asset -
Cash.
Accounting Equation Assets = Liabilities Owner’s Equity
Laundry Equipment, +50,000 = Notes Payable, +25,000 + 0
Laundry Supplies, +10,000 = 0 +0
Cash, -35,000
T-Accounts
Cash Laundry Equipment
1/2 100,000 1/3 35,000 1/3 50,000
Laundry Supplies Notes Payable

1/3 10,000 1/3 25,000
Journal Entry
Jan 3 Laundry Equipment P 50,000
Laundry Supplies 10,000
Cash P 35,000
Notes Payable 25,000
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Purchased laundry equipment and

Laundry supplies.
Jan 4 Transaction analysis The payment of rent increased an Expense (we will use the
Expense Method) and decreased an asset – Cash. Expense decreases
Capital. So, we debit Rent Expense and credit Cash.
Accounting Equation Assets = Liabilities + Owner’s Equity_________________

Cash, - 15,000 = 0 + E. Cruz, Capital - 15,000
T-Accounts
Cash Rent Expense
1/2 100,000 1/3 35,000 1/4 15,000
1/4 15,000
Journal Entry Jan 4 Rent Expense P15, 000

Cash P15, 000
Paid rent for three months.
Jan 6 Transaction Analysis The transaction resulted to an increase in Revenue (Revenue

Increases Capital) and an increase in asset- Cash.

Cash, + 2,500 = 0 + E. Cruz, Capital +2,500
T-Accounts
Cash Laundry Income
1/2 100,000 1/3 35,000 1/6 2,500
1/6 2,500 1/4 15,000
Journal Entry Jan 6 Cash P 2,500

Laundry Income P 2,500
Rendered services for cash.
Jan 10 Transaction Analysis This transaction increased asset –Cash for P2, 000 and another asset
-Note Receivable for P 3,000 and increased Revenue for P5, 000.
(Again, Revenue increases Capital).

Cash, + 2,000 = 0 + E. Cruz, Capital +5,000
Notes Receivable +3000
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T-accounts
Cash Laundry Income
1/2 100,000 1/3 35,000 1/6 2,500
1/6 2,500 1/4 15,000 1/10 5,000
1/10 2,000
Notes Receivable
1/10 3,000
Journal Entry Jan 10 Cash P2, 000

Notes Receivable 3,000
Rendered laundry services partly on account.
Jan 15 Transaction Analysis Jan 15 transaction increased asset – Accounts Receivable by P 1,500
and increased Revenue – Laundry Income by the same amount.
Laundry Income increases Capital.
Accounting Equation Assets = Liabilities + Owner’s Equity_

Accounts Receivable , + 1,500 = 0 + E. Cruz, Capital +1,500
T-accounts
Accounts Receivable Laundry Income
1/15 1,500 1/6 2,500
1/10 5,000
1/15 1,500
Journal Entry Jan 15 Accounts Receivable P 1.500

Rendered laundry services on account.
Jan 20 Transaction Analysis This transaction increased an asset – Cash by P3, 000 and decreased
Another asset – Notes Receivable.

Cash + 3,000 0 + 0
Notes Receivable - 3,000 =
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T- Accounts
Cash Notes Receivable
1/2 100,000 1/3 35,000 1/10 3,000 1/20 3,000
1/6 2,500 1/4 15,000
1/10 2,000
1/20 3,000

Notes Receivable P 3,000
Collections from customer on Jan 10.
Jan 25 Transaction Analysis This transaction increased two assets: Cash by P 2,000 and Accounts
Receivable by P 1,500; correspondingly, it increased Revenue –
Laundry Income by P3, 500. Laundry Income increases Capital.

Cash + 2,000= 0 + E. Cruz, Capital +3,500
Accounts Receivable , + 1,500
T-accounts
Cash Laundry Income
1/2 100,000 1/3 35,000 1/6 2,500
1/6 2,500 1/4 15,000 1/10 5,000
1/10 2,000 1/15 1,500
1/20 3,000 1/25 3,500
1/25 2,000
Accounts Receivable
1/15 1,500
1/25 1,500

Accounts Receivable 1,500
Rendered services partly on account.
Jan 28 Transaction Analysis Jan 28 transaction decreased liability –Notes Payable by P12,500 and
decreased an Asset- Cash by P12, 500 (1/2 of P 25,000).

Cash -12,500= Notes payable – 12,500 + 0
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T-accounts
Cash Notes Payable
1/2 100,000 1/3 35,000 1/28 12,500 1/3 25,000
1/6 2,500 1/4 15,000
1/10 2,000 1/28 12,500
1/20 3,000
1/25 2,000
Journal Entry Jan 28 Notes Payable P12, 500

Cash P12, 500
Partial payment for equipment.
Jan 30 Transaction Analysis Payment of expenses increased Expenses – Salaries and Utilities and
Reduced an Asset-Cash by the total amount of P6, 500. Increase in
Expenses decrease Capital.

Cash - 6,500= 0 + Salaries Expense - 5,000
Utilities Expense - 1,500
T-accounts
Cash Salaries Expense
1/2 100,000 1/3 35,000 1/30 5,000
1/6 2,500 1/4 15,000
1/10 2,000 1/28 12,500
1/20 3,000 1/30 6,500
1/25 2,000
Utilities Expenses
1/30 1,500
Journal Entry Jan 30 Salaries Expense P5, 000

Utilities Expenses 1,500
Cash P 6,500
Paid salaries and utilities.
Jan 31 Transaction Analysis The collection of amount due on January 15 increased an Asset – Cash
By P 1,500 and decreased another asset – Accounts Receivable by the
Same amount.

Cash + 1,500 = 0 + 0
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Account Receivable – 1,500
T-accounts
Cash Accounts Receivable
1/2 100,000 1/3 35,000 1/15 1,500 1/31 1,500
1/6 2,500 1/4 15,000 1/25 1,500
1/10 2,000 1/28 12,500
1/20 3,000 1/30 6,500
1/25 2,000
1/31 1,500
Journal Entry Jan 31 Cash P1, 500

Accounts Receivable P1, 500
Collection from customer.
Below is the journal consolidating our individual entries above for our illustrative problem:
Ge ne ra l Journa l Pa ge 1
Da te Accounts a nd Expl a na ti on P/R De bi t Cre di t
2017
Ja n 2 Ca s h P 100,000
E. C, Ca pi ta l P 100,000
I ni ti a l i nve s tme nt.
3 La undry Suppl i e s 10,000

La undry Equi pme nt 50,000
Ca s h 35,000
Note s Pa ya bl e 25,000
Bought l a undry s uppl i e s a nd l a undry e qui pme nt,
pa yi ng ful l a mount of the s uppl i e s
a nd 1/2 of the e qui pme nt.
4 Re nt Expe ns e 15,000
Ca s h 15,000
Pa i d re nt.
6 Ca s h 2,500
La undry I ncome 2,500
Re nde re d l a undry s e rvi ce s .
10 Ca s h 2,000
Note s Re ce i va bl e 3,000
Re nde re d l a undry s e rvi ce s .
15 Accounts Re ce i va bl e 1,500
Re nde re d l a undry s e rvi ce s on a ccount.
20 Ca s h 3,000
Note s Re ce i va bl e 3,000
Col l e cti on from cus tome rs .
25 Ca s h 2,000
Accounts Re ce i va bl e 1,500
28 Note s Pa ya bl e 12,500
Ca s h
Pa rti a l pa yme nt for l a undry e qui pme nt. 12,500
30 Sa l a ri e s Expe ns e 5,000
Uti l i ti e s Expe ns e 1,500
Ca s h 6,500
Pa i d s a l a ri e s a nd uti l i ti e s .
31 Ca s h 1,500
Accounts Re ce i va bl e 1,500
Col l e cti on from cus tome r.
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Additional pointers in journalizing:

 Debit entries are flush left and credit entries are indented.
 Leave a space after every entry.
 The year and month are written once in every journal page.
 The peso sign is written once in every column (debit column and credit column) in
every page of the journal
 The debit and credit columns of the journal are not totaled.
We have used the T-accounts in analyzing our transaction. Again, T-accounts represent the
Ledger. Below are the T-accounts after all the transactions were analyzed and recorded;
Cash Laundry Equipment Rent Expense

1/2 100,000 1/3 35,000 1/3 50,000 1/4 15,000
1/6 2,500 1/4 15,000 Bal. 50,000 Bal. 15,000
1/10 2,000 1/28 12,500
1/20 3,000 1/30 6,500 Notes Payable Salaries Expense
1/25 2,000 69,000 1/28 12,500 1/3 25,000 1/30 5,000
1/31 1,500 Bal. 12,500 Bal. 5,000
111,000
Bal. 42,000
Accounts Receivable E. Cruz, Capital Utilities Expenses

1/15 1,500 1/31 1,500 1/2 100,000 1/30 1,500
1/25 1,500 Bal. 100,000 Bal. 1,500
Bal. 1,500
Notes Receivable Laundry Income

1/10 3,000 1/20 3,000 1/6 2,500
1/10 5,000
1/15 1,500
1/25 3,500
Laundry Supplies Bal. 12,500
1/3 10,000
Bal. 10,000
The debit column and the credit column of each account are totaled.
The balance (Bal.) of each account is the difference between the total debits
and total credits. The balance should always be on the normal balance side of
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each account or on the increase side. Since these T-accounts represent the
ledger, allow me to proceed with the Trial balance discussions and prepare
one for the Wash and Wear Laundry Shop. The Posting of the journal entries
to the ledger will follow after the trial balance.
The Trial Balance

Preparation of the Trial Balance (Unadjusted) is the fourth step in the accounting cycle.
Since we have the T-accounts already for our illustrative problem, we can derive this ahead
of step 3 which is posting the journal entries to the ledger.
A Trial Balance is a list of all the accounts with their balances. This is also one way of
checking the accuracy of our journal entries and its postings. The total debits should be
equal to the total credits. But it doesn’t mean that if they are balanced or equal, it is
accurate or correct, not unless you know that you have journalized and posted the entries
correctly.
In preparing the trial balance, the accounts are listed sequentially. Assets first (current
assets first before non-current assets), then followed by liabilities (short-term first before
long-term liabilities), followed by Owner’s Equity, Revenues, Expenses, and Drawing, if any.
This will be very helpful in preparing the financial statements later.
Trial Balance is an internal document only not a financial statement or report.
We might be preparing three Trial Balances in one accounting period:

1. Unadjusted Trial Balance – one prepared before preparing and posting the adjusting
entries.
2. Adjusted Trial Balance – prepared after adjusting entries are posted in the ledger and
the account balances are already the adjusted ones.
3. Post-closing Trial Balance – one that is prepared after the closing entries are prepared,
recorded, and posted in the ledger.
Common Trial Balance Errors and How to correct them

 If the total debits and total credits are not equal, there might be a missing
amount. Locate it by tracing each account from the ledger to the ledger. (You
may also get the difference for an easier traceability).
 You may also divide the difference by 2. A debit treated as credit or vice versa,
usually doubles the error. Example: the accounting clerk has posted a P600
credit as a debit. The debit will now have a P 600. The out- of- balance amount
then is P 1200. Dividing this by 2 will result to P600 amount of a transaction.
Search the journal for a P600 transaction and trace the account affected.
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 Divide the out- of- balance amount by 9. If the result is equally divisible by 9, the
error may be a slide (example, writing P 500 as P50) or transposition (example,
writing P 520 as P250)
Example of a Trial Balance

We will use the account balances of Wash and Wear Laundry Shop as our example of
the (Unadjusted) Trial Balance.
Wash and Wear Laundry Shop
Trial Balance
January 31, 2017
Account Titles Debit Credit

Cash P 42,000
Account Receivable 1,500
Notes Payable P 12,500
E. Cruz, Capital
Laundry Income 12,500
Rent Expense 15,000
Salaries Expense 5,000
Utilities Expense 1,500
Total P 125,000 P 125,000
Posting the Journal Entries to the Ledger

Posting the journal entries to the ledger is the third step in the accounting cycle.
Ledger is an individual record of an account. A compilation of ledgers is called General
Ledger. General ledger is also called the book of final entry because it is the depository of
all business transactions and the ledger balances are the basis of preparing the income
statement and the statement of financial position.
Posting means copying or transferring the information from the journal to the ledger
accounts.
Steps in Posting the Journal Entries to the Ledger

Before doing the postings, prepare all the ledgers with the corresponding headings.
1. Copy or post the transaction date from the journal to the ledger.
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2. Copy the journal page number from the journal to the ledger. Place that in the
P/R column of the ledger. It indicates the source of the information in the ledger.
3. Copy the peso amount of the debit or credit from the journal to the
corresponding debit or credit column in the ledger.
4. Copy the account number from the ledger to the journal P/R column align with
the account title copied in the ledger.
P/R is the abbreviation I used for Posting Reference. You may also use Post. Ref
or F
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This is how the Journal will look like after the posting of entries to the ledger. Take note of
the P/R column, the account number from the ledger is copied here.
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These are the ledgers of Wash and Wear Laundry Shop after the posting of journal entries.
Take a look at the P/R columns, the journal page number (J1) was copied to know where
the postings came from. The balances were written on the item column and on the normal
side of each account.
Genera l Ledger
Ca s h Account No. 101
Da te Item P/R Debi t Da te Item P/R Credi t
2017 2017
Ja n 2 J1 P 100,000 Ja n 3 J1 P 35,000
6 J1 2,500 4 J1 15,000
10 J1 2,000 28 J1 12,500
20 J1 3,000 30 J1 6,500
25 J1 2,000 P 69,000
31 J1 1,500
P 42,000 P 111,000
Genera l Ledger
E. Cruz, Ca pi ta l Account No. 301
2017
Ja n 2 P 100,000 J1 P 100,000
Genera l Ledger
La undry Suppl i es Account No. 105
2017
Ja n 3 P 10,000 J1 P 10,000
Genera l Ledger
La undry Equi pment Account No. 110
2017
Ja n 3 P 50,000 J1 P 50, 000
Genera l Ledger
Notes Pa ya bl e Account No. 203
2017 2017
Ja n 28 J1 P 12,500 Ja n 3 P 12,500 J1 P 25,000
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Genera l Ledger
Rent Expens e Account No. 510
2017
Ja n 4 P 15,000 J1 P 15,000
Genera l Ledger
La undry Income Account No. 401
2017
Ja n 6 J1 P 2,500
10 J1 5,000
15 J1 1,500
25 J1 3,500
P 12,500 P 12,500
Genera l Ledger
Accounts Recei va bl e Account No. 102
2017
Ja n 25 P 1,500 J1 P 1,500
Genera l Ledger
Notes Recei va bl e Account No. 103
2017 2017
Ja n 10 J1 P 3,000 Ja n 20 J1 P 3,000
Genera l Ledger
Sa l a ri es Expens e Account No. 501
2017
Ja n 30 P 5,000 J1 P 5,000
Genera l Ledger
Uti l i ti es Expens e Account No. 509
2017
Ja n 30 P 1,500 J1 P 1,500
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From the ledger balances, the trial balance will be extracted.
Wash and Wear Laundry shop

Trial Balance
January 31, 2017
Account Titles Debit Credit

Cash P 42,000
Accounts Receivable 1,500
E. Cruz, Capital 100,000
Laundry Income 12,500
Rent Expense 15,000
Salaries Expense 5,000
Utilities Expense 1,500
Total P 125,000 P125,000
Please take note of how the accounts are arranged in the Trial Balance.
Assets (current, non-current)
Liabilities Balance Sheet accounts
Owner’s Equity
Revenues Income Statement accounts
Expenses
Simple Financial Statements

Let us prepare an Income Statement and a Statement of Financial Position.
Income Statement
For the Month Ended January 31, 2017

Less: Operating Expenses
Rent P 15,000
Salaries 5,000
Utilities 1,500 21,500
Net Profit (Net Loss) (P 9,000)
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Statement of Financial Position
As at January 31, 2017
Assets
Current Assets
Cash P 42,000
Account Receivable 1,500
Total P 53,500
Non-current Asset
Total Assets P 103,500
============
Liabilities and Owner's Equity
Liability
Owner's Equity
E. Cruz, Capital, Jan. 2, 2017 P 100,000
Add (deduct) Net Profit (Loss) (9,000)
E. Cruz, Capital Jan. 31, 2017 91,000
Total Liabilities and Owner's Equity P 103,500
===========
Net Profit will increase Capital while Net Loss will reduce Capital.
The Income Statement formula or Net Profit Equation
Revenue – Expenses = Net profit (Net Loss)
Revenue > Expenses = Net Profit or Net Income
Revenue < Expenses = Net Loss
The Balance Sheet Equation:

Or
Assets = Liabilities + [Owner’s Equity, beginning +(-) Net Profit (Net Loss)]
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Glossary
Account: a tool that details the changes in an accounting element.
Accounting cycle: a round of accounting processes starting from journalizing a
transaction to the preparation of the post-closing trial balance.
Accounting equation: the equality of assets and liabilities and owner’s equity.
Business transactions: events or activities of the business.
Credit : the left side of an account.
Debit: the right side of an account.
References and Supplementary Materials

Books and Journals
Cabrera, ME. B. (2010). Fundamentals of Accounting 1.Manila, Philippines: GIC
Enterprises and Co., Inc.
Horngren, C. T., Harrison, W. T. Jr., Bamber, L. S., (2002). Accounting (International

Edition). New Jersey, USA: Prentice Hall
Garcia, P.C., Mojar, B.Q. & Gemanil, B. A. (2006).Basic Accounting Concepts and
Procedures. Quezon City, Philippines: Rex Book Store, Inc.
Kimwell, M. B. (2009). Fundamentals of Accounting (Second Edition). Manila, Philippines.

GIC Enterprises and Co., Inc.
Online Supplementary Reading Materials
PDF]recording business transactions - Pearson Canada
www.pearsoncanada.ca/media/highered-showcase/multi.../horngren-ch02new.pdf
Accessed: March 18, 2017
Accounting Cycle | Steps | Flow Chart | Example - My Accounting Course

www.myaccountingcourse.com/accounting-cycle/
Trial balance – Accounting in Focus

accountinginfocus.com/tag/trial-balance/
Online Instructional Videos

Journalizing, Posting, and Preparing a Trial Balance - YouTube
https://www.youtube.com/watch?v=ipR6mjDSVj4
Course Module
Journal Entries and Trial Balance in Accounting - Video & Lesson...

study.com/academy/lesson/journal-entries-and-trial-balance-in-accounting.html
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Fundamentals of Accounting part 1

Module 005 Analyzing, Recording, Summarizing

This module covers the following basic/ introductory topics in accounting: an

The Accounting Cycle

Recording Phase includes the following steps:

Summarizing Phase consists of the following steps:

To simplify, the steps in the accounting process involve the following:

Business Transactions and Source Documents

 They should be supported by a source document.

The Account and the T-account

The Rules of Debit and Credit can be summarized as follows:

Debit to record Increase in Asset

Credit to record Decrease in Asset

A business transaction has dual effects on accounting elements, so remember that in

Accounting Equation and the Accounting Elements

(For examples, please see the succeeding sections of this module.)

Description of Account Titles

 Accumulated Depreciation - This is a contra account of depreciable assets such as

Analyzing and Recording of Business Transactions

 An entry or record made in the journal is called a journal entry.

Below is an example of Journal:

4 Laundry Supplies 10,000

Illustrative Problem 5.1 Analysis of Business Transactions to Journalizing –

Required: Prepare individual entries supported by analysis showing the effects of

Effect on the accounting equation:

1/2 100,000 1/2 100,000

Jan 3 Transaction analysisThe purchase of laundry equipment increased an asset- Laundry

Laundry Supplies Notes Payable

Purchased laundry equipment and

Accounting Equation Assets = Liabilities + Owner’s Equity_________________

Journal Entry Jan 4 Rent Expense P15, 000

Jan 6 Transaction Analysis The transaction resulted to an increase in Revenue (Revenue

Accounting Equation Assets = Liabilities + Owner’s Equity_________________

Journal Entry Jan 6 Cash P 2,500

Accounting Equation Assets = Liabilities + Owner’s Equity_________________

Journal Entry Jan 10 Cash P2, 000

Accounting Equation Assets = Liabilities + Owner’s Equity_

Journal Entry Jan 15 Accounts Receivable P 1.500

Accounting Equation Assets = Liabilities + Owner’s Equity_

Journal Entry Jan 20 Cash P 3,000

Accounting Equation Assets = Liabilities + Owner’s Equity_

Journal Entry Jan 25 Cash P 2,000

Accounting Equation Assets = Liabilities + Owner’s Equity_

Journal Entry Jan 28 Notes Payable P12, 500

Accounting Equation Assets = Liabilities + Owner’s Equity_

Journal Entry Jan 30 Salaries Expense P5, 000

Accounting Equation Assets = Liabilities + Owner’s Equity_

Account Receivable – 1,500

Journal Entry Jan 31 Cash P1, 500

3 La undry Suppl i e s 10,000

Additional pointers in journalizing:

Cash Laundry Equipment Rent Expense

Accounts Receivable E. Cruz, Capital Utilities Expenses

Notes Receivable Laundry Income

The Trial Balance

Trial Balance is an internal document only not a financial statement or report.

We might be preparing three Trial Balances in one accounting period:

Common Trial Balance Errors and How to correct them

Example of a Trial Balance

Account Titles Debit Credit

Posting the Journal Entries to the Ledger

Steps in Posting the Journal Entries to the Ledger