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UNIVERSIDAD DE STA. ISABEL
Elias Angeles St., Naga City
REVIEW ON BASIC ACCOUNTING
LESSON NO 2. RECORDING BUSINESS TRANSACTION
ACCOUNTING CYCLE. It refers to a series of sequential steps or procedures performed to
accomplish the accounting process.
1. Identification of the Events to be Recorded
Aim : To gather information about transactions or events generally through the
source documents.
2. Transactions are Recorded in the Journal
Aim : To record the economic impact of transactions on the firm on a journal, which is
a form that facilitates transfer to the accounts.
3. Journal Entries are Posted to the Ledger
Aim : To transfer the information from the journal to the ledger for classification.
4. Preparation of Trial Balance
Aim : To provide a listing to verify the equality of debits and credits in the ledger.
5. Preparation of the Worksheet including Adjusting Entries
Aim : To aid in the preparation of financial statements.
6. Preparation of Financial Statements
Aim : To provide useful information to decision makers.
7. Adjusting Journal Entries are Journalized and Posted
Aim : To record the accruals, expiration of deferrals, estimations and other events
from the worksheet.
8. Closing Journal Entries are Journalized and Posted
Aim : To close temporary accounts and transfer to profit to owner’s equity.
9. Preparation of Post-Closing Trial Balance
Aim : To check the equality of debits and credits after the closing entries.
10. Reversing Entries and Journalized and Posted.
Aim : To simplify the recording of certain regular transactions in the next accounting
period.
The General Journal
(the book of original entry) Shows all the effects of a transaction
in terms of debits and credits.
Office Equipment xx
Cash xx
Cash
The Ledger
A grouping of accounts which is
used to classify and summarize
transactions and to prepare data
for basic financial statements.
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Office Equipment
Trial Balance
Listing of all ledger accounts, Assets
in order, with their respective Liabilities
debit or credit balances. SOURCE DOCUMENTS Owner’s Equity
Revenues
1. Transactions and events are the starting point in the accounting process.
Expenses
2. Source documents identify and describe transactions and events entering the accounting
process.
3. These source documents contain information about the nature and amounts of the
transaction.
THE JOURNAL
1. The journal is a chronological record of the entity’s transactions.
2. A journal entry shows the effects of a business transaction in terms of debits and credits.
3. Each transaction is initially records in a journal rather than directly in the ledger.
4. It is called the book of original entry.
5. The general journal is the simplest journal.
FORMAT OF THE GENERAL JOURNAL
Journal page 1
Account Titles and
Date Explanation P.R. Debit Credit
1 2020
250,000.0
2 1-May Cash 0
250,000.0
3 SJK, Capital 0
4 Initial investment.
The standard contents are as follows:
1. Date. The year and month are not rewritten every entry unless the year or month changes or
a new page is needed.
2. Account Titles and Explanation. The account to be debited is entered at the extreme left
of the first line while the account to be credit is entered slightly indented on the next line. A
brief description of the transaction is usually made on the line below the credit. Generally,
skip a line after each entry.
3. P.R. (Posting Reference). This will be used when the entries are posted, that is, until the
amounts are transferred to the related ledger accounts. The posting will be described later.
4. Debit. The debit amount for each account is entered in this column.
5. Credit. The credit amount for each account is entered in this column.
SIMPLE AND COMPOUND ENTRY
1. In simple entry, only two accounts are affected – one account is debited and one account is
credited.
2. In compound entry, three or more accounts are affected.
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TRANSACTIONS ARE JOURNALIZED (Step 2)
1. After the transaction or event has been identified and measured, it is recorded in the journal.
2. The process of recording a transaction is called journalizing.
THE LEDGER
1. A grouping of the entity’s account is referred to as the ledger.
2. A general ledger is the “reference book” of the accounting system and is used to classify and
summarize transactions, and to prepare data for the basic financial statements.
3. The accounts in the general ledger are classified into two groups:
a. Balance Sheet or Permanent or Real Accounts. This refers to assets, liabilities and
owner’s equity.
b. Income Statement or Temporary or Nominal Accounts. This refers to income and
expenses.
4. Each account has its own records in the ledger.
CHART OF ACCOUNTS
1. A listing of all the accounts and their account numbers in the ledger is known as the chart of
accounts.
2. The chart is arranged in the financial statement order, that is, assets first, followed by
liabilities, owner’s equity, revenues and expenses.
3. The accounts should be numbered in a flexible manner to permit indexing and cross-
referencing.
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POSTING (Step 3)
1. Posting means transferring the amounts from the journal to the appropriate accounts in the
ledger.
2. Debits in the journal are posted as debits in the ledger and credits in the journal as credits in
the ledger.
Journ
al page 1
Account Titles and
Date Explanation P.R. Debit Credit
1 2020
250,000.
2 1-May Cash 00
250,000.
3 SJK, Capital 00
4 Initial investment.
The Ledger
Account
Account: Cash No. 110
Date Explanation J.R. Debit Credit Balance
1 2020
2 1-May Intial investment J-1 250,000.00
Account
Account: SJK, Capital No. 310
Date Explanation J.R. Debit Credit Balance
1 2020
2 1-May Intial investment J-1 250,000.00
Illustration of T- Account:
Cash
May
May 1 250,000.00 1 8,000.00
2 210,000.00 4 420,000.00
10 26,400.00 4 14,400.00
15 10,000.00 5 15,000.00
30 24,000.00 9 10,000.00
13 6,600.00
25 14,000.00
27 7,200.00
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31 3,000.00
520,400.00 498,200.00
Balanc
e 22,200.00
TRIAL BALANCE (Step 4)
1. The trial balance is a list of all accounts with their respective debit or credit balances.
2. It is prepared to verify the equality of debits and credits in the ledger at the end of each
accounting period or at any time the postings are updated.
3. The procedures in the preparation of the trial balance follow:
a. List all the accounts in numerical order.
b. Obtain the account balance of each account from the ledger and enter the balances in the
debit or credit balances in the credit column.
c. Add the debit and credit columns.
d. Compare the totals.
4. The trial balance is a control device that helps minimize accounting errors.
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EXERCISES
PROBLEM 1 DEBITS AND CREDITS
Innovative Designs, owned by Felipe Niza Jr., has been operating for two years. Below is a series of
transactions.
Required:
For each transaction, indicate the accounts that should be debited and credited. It no journal entry is
required, write “N/A’ in the columns. Use the following accounts:
Cash Notes Payable
Account Receivable Salaries Payable
Supplies Noza, Capital
Prepaid Expenses Niza, Withdrawals
Equipment Service Revenue
Patents Operating Expenses
Accounts Payable
Transactions Debit Credit
a. Purchased equipment for use in the business; paid one
third cash and gave a note payable for the balance.
b. Paid cash for salaries.
c. Collected cash for services performed this period.
d. Collected cash for services performed last period.
e. Performed services this period on credit.
f. Paid operating expenses incurred in this period.
g. Paid cash for operating expenses incurred last period.
h. Incurred operating expenses this period to be paid next
period.
i. Purchased supplies for inventory to be used later, paid
cash.
j. Used some supplies from inventory to operations.
k. Purchased a patent; paid cash.
l. Made a payment on the equipment note in (a); the
payment was part principal and interest.
m. Collected cash on account receivable for services
previously performed.
n. Paid cash on accounts payable for expenses previously
incurred.
o. On the last day of current period, paid cash for an
insurance policy covering 12 months.
PROBLEM 2 CLASSIFICATION OF ACCOUNTS
The following ledger accounts are used by Cardo Dalisay Repair Shop:
a. Cash c. Account Receivable
b. Salaries Expense d. Dalisay, Capital
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e. Service Revenues o. Unearned Revenue
f. Prepaid Rent p. Office Equipment
g. Accounts Payable q. Rent Payable
h. Land r. Notes Receivable
i. Supplies Expense s. Interest Expense
j. Prepaid Insurance t. Notes Payable
k. Utilities Expense u. Supplies
l. Service Revenues v. Interest Receivable
m. Dalisay, Withdrawals w. Rent Expense
n. Salaries Payable
Required: Indicate each account’s classification and normal balance by placing (/) marks.
Type of Account Normal Balance
Asset Liabilities Owner’s Equity
Dalisay, Dalisay, Revenue Expense Debit Credit
Capital Withdrawals
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
l.
m
.
n.
o.
p.
q.
r.
s.
t.
w.
PROBLEM 3 JOURNALIZING, POSTING AND PREPARATION OF TRIAL BALANCE
The Chart of Accounts for Juanita Pineda Delivery Services is as follows:
Assets Income
110 Cash 410 Delivery Revenues
120 Account Receivable Expenses
130 Prepaid Insurance 510 Salaries Expenses
140 Service Vehicle 520 Gasoline and Oil Expenses
150 Office Equipment 530 Repairs Expense
Liabilities 540 Advertising Expense
210 Accounts Payable 550 Supplies Expense
Owner’s Equity 590 Miscellaneous Expense
310 Pineda, Capital
320 Pineda, Withdrawals
The company completed the following transactions in May 2020:
May 3 Placed four week-end advertisements in the Sun Daily for Php 18,500.00; the amount is due in 30 days.
6 Bought supplies on account from Supplier C, Php 8,800.00.
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15 Juanita Pineda invested in the business own office equipment with a fair market value of Php 52,500.00.
17 Received Php 61, 800.00 from charge customers to apply on their own accounts.
22 Received a bill from Park Trucking for repair services performed, Php 8,500.00.
26 Paid Supplies, Inc, Php 8,800.00 in full payment of account.
29 Paid salaries to employees, Php 21,000.00
30 Received Php 39,300.00 for services performed.
31 Received and paid gasoline and oil bill to the service vehicle, Php 12,500.00.
31 Billed South China Bank for services performed, Php 45,000.00.
31 Dalisay withdrew cash for personal use, Php 14, 500.00.
