Module 2 RECORDING TRANSACTIONS AND ADJUSTING ENTRIES

Introduction to the Module

This module is composed of two topics. Topic one will discuss on recording transactions for service
business entity. It is divided into three lessons: recording transactions at the general journal thru
accounts titles; posting appropriate accounts to the general ledger; summarizing the accounts in
the worksheet and correcting erroneous journal entries.
Topic two of this module will introduce the adjusting entries and its pro-forma for accrued income
and accrued expense, prepaid items, and advance receipt. It will also tackle the depreciation of
fixed assets and its corresponding adjusting entries, and accounts receivable doubtful accounts
including writing off and subsequent payment collections.
In recording business transaction one should know the basics of accounting, the elements of
accounting and its subsequent account titles. More importantly, on analysis of each business
transaction correspond to the debit and credit principle.

Topic 1 Recording Transaction for Service Business

Time Frame Week 6-7 | 6 hours

Learning Outcome | At the end of this topic, you should be able to:

1. Differentiate the three (3) types of Books of Accounts that the organizations may use in
maintaining its accounts;
2. Describe the Chart of Accounts and explain its purpose;
3. Apply the concept of debit and credit in journalizing the financial transactions;
4. Explain the difference between permanent withdrawal and temporary withdrawal;
5. Demonstrate how to post the journal entries to the appropriate general ledgers;
6. Discuss the trial balance and its relationship with the General ledger; and
7. Discuss the three kinds of accounting errors and correlating entries to correct the errors.

Materials

Paper, pen, and calculator

Lesson 1 The General Journal

Pre-Test

Instruction: True or False: Answer the questions carefully. Write your answers on the
ANSWER SHEET provided.
1. General Journal is also called the Book of Original Entry.
2. Compound entry have at least two debits or at least two credits.
3. There are two columns at the right side of the General journal called debit and credit
4. Journalizing the transactions should be done everyday with or without business activity.
5. Simple entry is a journal entry with only one debit and one credit.

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 Vocabulary List

None

Acronyms

 BIR – Bureau of Internal Revenue

 BOA – Books of Accounts
 NGAS – National Government Accounting System

Engagement Activity

On the ANSWER SHEET provided, write your name as well as the date of taking this activity.
And provide answers or follow instructions as per below:

List down 5 account titles that you remember from the last lessons.

ASSETS LIABILITIES INCOME EXPENSES

Double-Entry Bookkeeping System

After learning to analyze transactions using the accounting equation, one is now ready to learn the
double-entry bookkeeping system. To recall, this system uses the tools debit and credit in recording
transactions. Furthermore, this concept dictates that for every debit, there is at least one credit
and vice-versa. The amount in the credit side is always equal to the amount in the debit side.
Many organizations in the Philippines are adopting the double-entry bookkeeping system in
maintaining their financial records. Further, the government of the Philippines is adopting the
National Government Accounting System (NGAS) in processing government transactions.
After the registration of the Books of Accounts (BOA) with the Bureau of Internal Revenue, the
organization may already use the books to record its transactions. It can be noted that there are
three (3) types of Books of Accounts: the Manual Books of Accounts, the Loose-leaf Books of
Accounts, and the Computerized Books of Accounts.
Books of accounts that are initially registered with the BIR is called the Manual Books of Accounts
and organizations have an option to use it or adapt the other two (2) types of Books of Accounts.
The second type is the Loose-leaf Books of Accounts. If the organization is planning to use Microsoft
Excel in maintaining the its accounts, then the organization is required to register the templates
with the BIR before starting the recording process. Lastly, the third type is the Computerized Books
of Accounts. In this type, organization are using an accounting software in maintaining its accounts..
Chart of Accounts
The chart lists of account titles to be used by the business and the related account numbers.
Account numbers are significant in posting which is the step after recording the transactions.

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Normally, assets start with digit 1, liabilities with digit 2, owner’s equity with digit 3, income with
digit 4, and expenses with digit 5.
The following is a typical example of chart of accounts.
ASSETS 100 INCOME 400
Cash 101 Service Income 410
Investment in Trading Securities 102 Dividend Income 415
Accounts Receivable 103 Interest Income 420
Allowance for Doubtful Accounts 104
Notes Receivable 105 EXPENSES 500
Advances to Employees 106 Advertising & Promotion Expense 510
Prepaid Rent 107 Commission Expense 520
Office Supplies 108 Donation Expense 525
Land 109 Fringe Benefit Expense 530
Store Equipment 110 Fuel & Oil Expense 535
Office Equipment 111 Insurance Expense 540
Building 120 Professional Fee 545
Accumulated Depreciation-Stor 130 Rent Expense 550
Equipment
Accumulated Depreciation-Offic 131 Repair & Maintenance Expense 555
Equipment
Accumulated Depreciation-Building 140 Salaries & Wages Expense 560
SSS Premiums Expense 565
LIABILITIES 200 Philhealth Contribution Expense 570
Accounts Payable 201 Pag-ibig Contribution Expense 575
Notes Payable 220 Subscription Expense 580
Utilities Payable 230 Tax & License Expense 585
Unearned Advertising 240 Travel Expense 590
Mortgage Payable 250 Utilities Expense 591
Bad Debt Expense 592
OWNER’S EQUITY 300 Depreciation Expense 593
Owner, Drawing 310 Interest Expense 594
Owner, Capital 320 Miscellaneous Expense 595

LET US RECALL!

Debit and Credit as Accounting Tools

The following table shows the appropriate accounting tool for the effects of the financial
transactions on assets, liabilities, capital, income, and expenses.
Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Capital Decrease Increase

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 Income Increase
Expense Increase

Referring to the transaction in below, the account titles to be debited and credited are the following:
# Transaction Debit Credit
1 Cash investment of the owner Cash Owner, Capital
2 Permanent cash withdrawal of the owner Owner, Capital Cash
3 Borrowing of money by the issuing Cash Notes Payable
promissory note
4 Payment of the principal and interest of Notes Payable Cash
the promissory note Interest Expense
5 Cash advance to an employee Advances to Cash
Employee
6 Purchase of office for cash Office Supplies Cash
7 Purchase of office supplies on account Office Supplies Accounts Payable
8 Purchase of store equipment for cash Store Equipment Cash
9 Purchase of store equipment on account Store Equipment Accounts Payable
10 Partial payment of accounts payable Accounts Payable Cash
11 Rendering of services for cash Cash Service Income
12 Rendering of services on account Accounts Receivable Service Income
13 Full collection of accounts receivable Cash Accounts
Receivable
14 Cash receipt for commission income Cash Commission
Income
15 Payment of advertising Advertising Expense Cash

Types of Withdrawal
There are two (2) types of withdrawal: Permanent withdrawal and Temporary withdrawal. The
difference lies on the intention of the owner to replace the withdrawn items.
If the owner does not have an intention of replacing the withdrawn items, then the withdrawal is
called Permanent withdrawal; otherwise the transaction is called Temporary withdrawal. For
temporary withdrawals, the appropriate account to be debited is Owner, Drawing.
Referring to transaction #2 in the above example, the debited account if Owner, Capital because
the transaction is a permanent withdrawal.
Journalizing in the General Journal
This refers to the process of recording the financial transactions in the General Journal or in the
Book of Original Entry.
The following are the examples of Journal Entries:
Given the following transactions of Cindy Spa and Fitness Club, prepare the journal entries for the
month of April 2019

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 1 Cindy opened her health and fitness center with investments of various exercise
equipment worth 745,000.00, tables and chairs for the reception area costing 44,000.00,
and various materials and chemical supplies for the spa worth 12,700.00
2 Cindy opened a bank account in the name of her business for 25,000.00
3 Paid business permits totaling 2,100.00
4 Poly, a customer, subscribed to the club by paying membership fees of 15,000.00
5 Purchased office supplies for 7,000.00 cash

Using the following chart of accounts, post the journal entries of Cindy Spa and Fitness Club.
ASSETS 100 OWNER’S EQUITY 300
Cash 101 Cindy, Drawing 310
Investment in Trading Securities 102 Cindy, Capital 320
Accounts Receivable 103
Allowance for Doubtful Accounts 104 INCOME 400
Notes Receivable 105 Membership Fees 410
Advances to Employees 106 Interest Income 420
Spa Supplies 107
Office Supplies 108 EXPENSE 500
Land 109 Salaries & Wages Expense 510
Exercise Equipment 110 Rent Expense 520
Furniture and Fixtures 111 Advertising & Promotion Expense 530
Building 120 Commission Expense 540
Accumulated Depreciation-Exercis 130 Donation Expense 550
Equipment
Accumulated Depreciation-Furnitur 131 Insurance Expense 560
and Fixtures
Accumulated Depreciation-Building 140 Travel Expense 570
Utilities Expense 580
LIABILITIES 200 Tax & License Expense 590
Accounts Payable 210 Depreciation Expense 591
Notes Payable 220 Interest Expense 592
Utilities Payable 230 Repairs and Maintenance Expense 593
Unearned Advertising 240 Bad debts Expense 594
Mortgage Payable 250 Miscellaneous Expense 595

General Journal
Date Particulars F Debit Credit
2019
April 1 Exercise Equipment 110 745,000.00
Furniture and Fixtures 111 44,000.00
Spa Supplies 107 12,700.00
Cindy, Capital 320 801,700.00
Investments of Cindy

1 Cash 101 25,000.00

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 Cindy, Capital 320 25,000.00
Investments of Cindy

2 Tax & License Expense 590 2,100.00

Cash 101 2,100.00
Payment of business permit

4 Cash 101 15,000.00

Membership Fees 410 15,000.00
Customer subscription

5 Office Supplies 108 7,000.00

Cash 101 7,000.00
Purchased supplies for cash

Simple Entry and Compound Entry

Simple Entry is a journal entry with only one debit and one credit. On the other hand, Compound
Entry is a journal entry with at least two debits or at least two credits. See above example on the
first transaction.

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