Far Lesson 5

Document no.
INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)

Effective Date:
TITLE: SOLE PROPRIETORSHIP, PARTNERSHIP and
CORPORATION
September 2020
Revision No. 00
LESSON 5
BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM
(8 Hours)
The Books of Accounts
A business maintains two books of accounts;S
2. Journal
The journal, also called the “book of original entries,” is the accounting record where business
transactions are first recorded. Business transactions are recorded in the journal through journal cities. This
recording process is called journalizing.
Types of Journals
3. Special Journal – is used to record transactions of a similar nature. Special journals simplify the
recording process, thus providing an efficient way of recording and retrieving of information.
Common examples of Special journals
a. Sales journal – is used to record sales on account.
b. Purchases journal – is used to record purchases of inventory on account
c. Cash receipts journal – is used to record all transactions involving receipts of cash.
d. Cash disbursements journal – is used to record transactions involving payments of cash.
A business may have other special journals to sit its needs. For example: “Purchase returns journal,”
“Sales returns journal,” etc.
4. General Journal – All other transactions that cannot be recorded in the special journals are recorded
in the general journal. Examples of such transactions include purchases of inventory in exchange for
notes payable, adjusting entries, correcting entries reversing entries, and the like.
If a business does not utilize special journals, all its transactions are recorded in the general journal.
Examples:
5. You sold barbecue to a customer who promised orally to pay the sale price next week.
 This transaction involves sale on account; therefore, it is recorded in the sales journal.
6. You sold barbecue to a customer who immediately paid the sale price
 This transaction involves the receipt of cash; therefore, it is recorded in the cash receipts journal.
C You sold barbecue to a customer who promised in writing to pay the sale price next week.
 This transaction cannot be recorded in the special journals: therefore, it is recorded in the general
journal.
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00 Original Subject Teacher Program Coordinator/Dean Academic Affairs September 2020 52 of 160
Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
Ledger
The ledger is a systematic compilation of a group of accounts. It used to classify the effects of business
transactions on the account. The ledger is also called the “book of secondary entries” or “book of final
entries” because it is used only after business transactions are first recorded in the journals. The process
recording in the ledger is called “posting.”
Kinds of Ledgers
a. General ledger – contains all the accounts appearing in the trial balance.
b. Subsidiary ledger- provides a breakdown of the balances of controlling accounts.

TEACHER’S INSIGHT
 A controlling account (or control account) is one which consists of a group of accounts with
similar nature. The balance of the controlling account is shown in the general ledger, while
the balances of the accounts that comprise the controlling account are shown in the
subsidiary ledger. Not all accounts in the general ledger though are controlling accounts.
Only those whose balances necessarily need a breakdown are considered controlling
accounts.
Example:
You sell barbecue on credit. The balance of credit sales not yet collected is ₱2,000. This information is
shown in Account Receivable, which is a controlling account in the General Ledger.
However, knowing only the total balance is insufficient You need a breakdown of this amount. You
need information on which customers owe you money and the amount each customer owes you. This
information is provided by the Subsidiary Ledger.
Analyze the illustration below.
General Ledger Subsidiary Ledgers
Accounts Receivable from

Customer A, ₱400.
Accounts Receivable, Accounts Receivable from

₱2,000 Customer B, ₱600.
Accounts Receivable from

Customer C, ₱1,000.

Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
TEACHER’S INSIGHT
Books of Accounts Description Function
1. Journal  Book of original  Journalizing
a. General Journal entries (Initial Recording)
b. Special Journals
2. Ledger  Book of secondary  Posting
a. General Ledger entries (Classifying)
b. Subsidiary Ledger
Formats of the Books of Accounts
General Journal
Date column – Indicates the recording Account titles column – the Account numbers column – the
dates of the transactions. accounts affected by a business corresponding numberings of the
Transactions are recorded in the journal transaction are recorded in this accounts affected by the transaction are
chronologically, meaning arranged by dates. column. listed here.
GENERAL JOURNAL
Date Account titles Acct. Debit Credit
#s.
01/01 Cash 110 ₱2,000 00
Ralph, Capital 310 ₱2,000 00
To record initial investment of Ralph.
Debit & Credit columns – the Centavos are

monetary effects of the transaction to Placed here.
the accounts are recorded here
Other columns may be included, such as “posting reference” (P.Ref.) which is used to cross-reference
journal entries to the ledger, and journal entry number (GJ No.) which is used to number the journal
entries.
Special Journal
A special journal can have the following format:
CASH RECEIPTS JOURNAL

Date Description Accounts Sales Sundry Credits
receivable Credit Credit Account title Amount Cash Debit
Accounts that are normally Accounts affected by a The amount of credit to a The amount of cash
credited when cash collection transaction other than “accounts “sundry” account is collection (debit to cash)
is recorded are separately receivable” and “sales” are recorded here. is recorded here
indicated here. This recorded here. “Sundry” means
eliminates the need to record miscellaneous or various.
these accounts repeatedly
each me a collection is made.

Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
General Ledger & Subsidiary Ledgers
SUBSIDIARY LEDGERS GENERAL LEDGER
Customer A ACCOUNTS RECEIVABLE No. 120

Date Ref. Debit Credit Balance Date Ref. Debit Credit Balance
Balance forwarded 1,000.00 Balance forwarded 40,000.00
July 2, 20x1 4,000.00 5,000.00 July 2, 20x1 6,000.00 46,000.00
Customer B
Date Ref. Debit Credit Balance
Balance forwarded -
July 2, 20x1 2,000.00 2,000.00
Double-entry system
All transactions are recorded in the accounting records using the “double-entry system”. Under this system
each transaction is recorded in two parts – debit and credit. No transaction is recorded by a debit alone or
a credit alone. For each amount that is debited, there must be corresponding amount that is credited, and
vice-versa. This is in order for the accounting equation to be balanced at all times. If at any time the
accounting equation does not balance, there is an error.
Recall from our previous discussions that debit (Dr) simply refers to the left side of an account, while credit
(Cr.) refers to the right side of an account.
Concepts of Duality and Equilibrium
The double-entry system involves the use of the concepts of “duality” and “equilibrium.”
1. The concept of duality views each transaction as having a two-fold effect on values – a value received
and a value parted with and each transaction is recorded using at least two accounts recorded in terms of
equal debits and credits. For every peso
2. The concept of equilibrium requires that each transaction is debited, there is a corresponding peso
credited, and vice versa.
Normal balances of accounts
The normal balance of an account is on the side where an increase in that account is recorded. The
following are the normal balances of accounts:
Types of Account Normal balance

Asset Debit
Liability Credit
Equity Credit
Income Credit
Expense Debit
To help us remember the normal balances of account, let us recall the expanded basic accounting
equation.

Document no.
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CORPORATION
September 2020
Revision No. 00
Assets = Liabilities + Equity + Income - Expenses

 “Assets” which is on the left side of the equation has a normal debit balance.
 “Liabilities,” “Equity,” and“Income” which are additions on the right side of the equation have
normal credit balances.
 “Expenses” which is a deduction on the right side of the equation has a normal debit balance.
 Income increases equity, thus, it has normal credit balance (same with equity.) Expense
decreases equity, thus, it has normal debit balance (opposite of that of equity).
 Another way to depict the normal balances of the accounts is as follows:
DEBITS CREDITS
Assets + Expenses = Liabilities + Equity + Income
TEACHER’S INSIGHT
 Friendly Advice: I encourage you to memorize the normal balances of the accounts as this
will make your study Accounting much easier.
Rules of Debits and Credits
To debit an account with a normal debit balance means to increase that account. To credit means to
decrease it.
To credit an account with a normal credit balance means to increase that account. To debit means to
decrease it. Analyze the table below.
Type of account Normal balance Debit Credit

Asset Debit Increase Decrease
Liability Credit Decrease Increase
Equity Credit Decrease Increase
Income Credit Decrease Increase
Expense Debit Increase Decrease
Recall the following concepts:
 An account takes the form of a “T-account which resembles the alphabetical letter “T.”
 The left side of all accounts is the debit side, while the right side of all accounts is the credit side
 The normal balance of an account is the side where that account is increased.
The previous concepts are integrated in the following illustration:
Balance Sheet Accounts
ASSET ACCOUNTS LIABILITY ACCOUNTS

Debit for increases (+) Credit for decreases (-) Debit for decreases (-) Credit for increases (+)
EQUITY ACCOUNTS
Debit for decreases (-) Credit for increases (+)

Document no.
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Revision No. 00
Income Statement Accounts
EXPENSE ACCOUNTS INCOME ACCOUNTS

Debit for increases (+) Credit for decreases (-) Debit for decreases (-) Credit for increases (+)
Ending balance of an account
Debits to specific asset or expense account should be great than or equal to the credits to that account.
On the other hand, credits a liability, equity or income account should be greater than or equal to the
debit to that account.
The difference between the monetary totals of debits and credits to an account represents the ending
balance of the account. The minimum ending balance of an account is zero. The occurs when the total
debits equal total credits to an account.
If an asset or expense account results to an ending balance that is a credit, meaning the total
amount of debits is less than the total amount of credits the account is said to have an abnormal
balance. This means a recording error has been committed. A correction is needed to eliminate the
abnormal balance. This is who true when a liability, equity, or income account results to an ending balance
that is a debit. Analyze the T-accounts below:
1.
ASSET ACCOUNTS Ending Balance of ₱160 is a “normal balance”

Debit Credit because the debits is greater than the total
200 40 credits.
160
2.
ASSET ACCOUNTS The asset account has a zero balance. This is the
Debit Credit minimum balance an asset account can have. A
200 200 zero balance occurs when total debits equal total
0 credits.
3.
ASSET ACCOUNTS The ending balance of the asset account is an

Debit Credit “abnormal balance” because the total debits are
200 240 less than the total credits.
40

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4.
LIABILITY ACCOUNTS The ending balance of the liability account is

Debit Credit an “abnormal balance” because the total credits
240 200 are less than the total debits.
40
Illustration: Rules of debits and credits
Case #1: Asset account

At the beginning of the period, you have a cash balance of ₱2,000. During the period, you had total cash
collections amounting to ₱10,000 and made total cash payments of ₱8,000.
Requirement: Using “T “ analysis, compute for the ending balance of your cash.
Solution:
Cash
Dr. Cr.
Beginning Balance 4,000
Cash Collections 20,000 16,000 Cash payments
Ending Balance 8,000
Notes:
 The beginning balance is placed on the debit side because “Cash” is an asset account and assets
have a normal debit balance.
 Cash collections increase the balance of cash; thus, they are placed on the debit side.
 Cash payments decrease the balance of cash; thus, they are placed on the credit side.
 The ending balance is the difference between the total debits and total credits in the account. It
is computed as follows: 4,000 Dr. + 20.000 Dr. – 16,000 Cr. = 8,000 ending balance.
 The 4,000 and 20,000 amounts are added because they are both debits. The 16,000 amount is
deducted because it is a credit.
TEACHER’S INSIGHT
 “Debit and debit” results to addition. Same is true for “credit and credit.”
 “Debit” and “credit,” or vice-versa, results to deduction.
Case 2: Liability account
At the beginning of the period, you have a note payable of ₱2,400. During the period, you obtained an
additional loan amount ₱1,600 and made total payments of ₱1,000.
Requirement: Using “T “ analysis, compute for the ending balance of your notes payable.
Solution:

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Notes Payable
Dr. Cr.
2,400 Beginning Balance
Payments on the loan 1,000 1,600 Additional Loan
3,000 Ending Balance
Notes:
 The beginning balance is placed on the credit side because “Notes Payable” is a liability account
and assets have a normal credit balance.
 Additional Loan increase the balance of notes payable; thus, they are placed on the credit side.
 Payments of loan decrease the balance of notes payable; thus, they are placed on the debit side.
 The ending balance is the difference between the total credits and total debits in the account. It
is computed as follows: 2,400 Cr. + 1,600 Cr. – 1,000 Dr. = 3,000 ending balance.
 The 2,400 and 1,600 amounts are added because they are both credits. The 1,000 amount is
deducted because it is a debit.
Contra and Adjunct accounts
Some accounts have related accounts to them. An account related to another account is referred to as
either a contra account or an adjunct account.
 Contra accounts are presented in the financial statements as deduction to their related accounts.
 Adjunct accounts are presented in the financial statements as addition to their related accounts.
Thus:
 If an account has a normal debit balance, its contra account has a normal credit balance (the
opposite). To credit a normal debit balance means to deduct.
 If an account has a normal debit balance, its adjunct account has a normal debit balance (the
same). To debit a normal debit balance means to add.
On the other hand:
 If an account has a normal credit balance, its contra account has a normal debit balance (the
opposite). To debit a normal credit balance means to deduct.
 If an account has a normal credit balance, its adjunct account has a normal credit balance (the
same). To credit a normal credit balance means to add.
TEACHER’S INSIGHT
 A contra asset account has a normal credit balance, while an adjunct asset
account has a normal debit balance.
Examples of accounts with contra accounts:
ACCOUNT RELATED ACCOUNT

• Accounts receivable  Allowance for bad debts
 Type of account: CONTRA ACCOUNT
• Building  Accumulated depreciation-building
• Equipment  Accumulated depreciation-equipment

Document no.
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The sum of the balances of an account and its related contra or adjunct account is called the net
carrying amount (or simply the ‘carrying amounts’) of that account.
Example 1:
Your accounts receivable has a balance of ₱100,000, while the related allowance for bad debts account has
a balance of ₱20,000. How much is the carrying amount of your accounts receivable?
Accounts receivable ₱100,000

Allowance for bad debts ₱20,000
Accounts receivable-net ₱80,000
The “Allowance for bad debts” is deducted because it is a contra account to “Accounts receivable.”
Example 2:
You have a building with a historical cost of ₱1,000,000 and an accumulated depreciation of ₱300,000. How
much is the carrying amount of your building?
Building ₱1,00,000
Accumulated depreciation – Building 300,000
Building – net ₱ 700,000

Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
TEACHER’S INSIGHTS
 The two books of accounts are the Journal and the

Ledger.
 Business transactions are first recorded in the journal
(“book of original entries”). Subsequently, the effects
of the transaction on the accounts are posted to the
ledger (“book of secondary entries”).
 Special journals are used to record transactions of a
similar nature. Transactions that cannot be recorded in
the special journals are recorded in the General
journal.
 The General ledger contains all the accounts appearing
in the trial balance. The Subsidiary ledger provides a
breakdown of the controlling accounts in the general ledger.
 Under the “double-entry system” each transaction is recorded in two parts – debit
and credit.
 Assets and Expenses have normal debit balances, while Liabilities, Equity, and Income
have normal credit balances.
 For an asset or expense account: debit means increase while credit means
decrease.
 For a liability, equity or income account: debit means decrease while credit means
increase.


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Document no.

INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)

A business maintains two books of accounts;S

Common examples of Special journals

a. Sales journal – is used to record sales on account.

b. Purchases journal – is used to record purchases of inventory on account

d. Cash disbursements journal – is used to record transactions involving payments of cash.

Revision No. Details Organizer Reviewer Approving Date Page No.

b. Subsidiary ledger- provides a breakdown of the balances of controlling accounts.

Analyze the illustration below.

General Ledger Subsidiary Ledgers

Accounts Receivable from

Accounts Receivable, Accounts Receivable from

Accounts Receivable from

Revision No. Details Organizer Reviewer Approving Date Page No.

Debit & Credit columns – the Centavos are

A special journal can have the following format:

CASH RECEIPTS JOURNAL

Revision No. Details Organizer Reviewer Approving Date Page No.

General Ledger & Subsidiary Ledgers

SUBSIDIARY LEDGERS GENERAL LEDGER

Customer A ACCOUNTS RECEIVABLE No. 120

Normal balances of accounts

Types of Account Normal balance

Revision No. Details Organizer Reviewer Approving Date Page No.

Assets = Liabilities + Equity + Income - Expenses

Rules of Debits and Credits

Type of account Normal balance Debit Credit

The previous concepts are integrated in the following illustration:

Balance Sheet Accounts

ASSET ACCOUNTS LIABILITY ACCOUNTS

Revision No. Details Organizer Reviewer Approving Date Page No.

Income Statement Accounts

EXPENSE ACCOUNTS INCOME ACCOUNTS

Ending balance of an account

ASSET ACCOUNTS Ending Balance of ₱160 is a “normal balance”

ASSET ACCOUNTS The ending balance of the asset account is an

Revision No. Details Organizer Reviewer Approving Date Page No.

LIABILITY ACCOUNTS The ending balance of the liability account is

Illustration: Rules of debits and credits

Case #1: Asset account

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On the other hand:

ACCOUNT RELATED ACCOUNT

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 Type of account: CONTRA ACCOUNT

Accounts receivable ₱100,000

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 The two books of accounts are the Journal and the

Revision No. Details Organizer Reviewer Approving Date Page No.

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