AC 101 Prof.
Nova Grace Latina
Financial Accounting
CHAPTER 3: RECORDING OF BUSINESS TRANSACTIONS
I. ACCOUNTING CYLE
The accounting cycle refers to a series of sequential steps or procedures
performed to accomplish the accounting process.
Step 1 Identification of Events to be Recorded
Aim: To gather information about transactions or events generally
through the source documents.
Step 2 Transactions are Recorded in the Journal
Aim: To record the economic impact of transactions on the firm in a
journal, which is a form that facilitates transfer to the accounts.
Step 3 Journal Entries are Posted to the Ledger
Aim: To transfer the information from the journal to the ledger for
classification
Step 4 Preparation of a Trial Balance
Aim: To provide a listing to verify the equality of debits and credits in
the ledger.
Step 5 Preparation of Adjusting Entries
Aim: To aid in the preparation of financial statements.
Step 6 Preparation of the Financial Statements
Aim: To provide useful information to decision-makers.
Step 7 Adjusting Journal Entries are Journalized and Posted
Aim: To record the accruals, expiration of deferrals, estimations and
other events from the worksheet.
Step 8 Closing Journal Entries are Journalized and Posted
Aim: To close temporary accounts and transfer profit to owner’s
equity.
Step 9 Preparation of a Post-Closing Trial Balance
Aim: To check the equality of debits and credits after the closing
entries.
Step 10 Reversing Journal Entries are Journalized and Posted
Aim: To simplify the recording of certain regular transactions in the
next accounting period.
This cycle is repeated each accounting period. The first three steps in the
accounting are accomplished during the period. The fourth to the ninth steps
generally occur at the end of the period. The last step is optional and occurs at
the beginning of the next period.
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AC 101 Prof. Nova Grace Latina
Financial Accounting
The General
Journal
(the book of POSTING
original entry)
Transferring the amounts from the
Office Equipment xx general journal to appropriate
Cash xx accounts in the ledger.
Accounts Payable xx
CASH
OFFICE
EQUIPMENT
THE LEDGER
(the book of final entry)
A grouping of accounts. Used to
classify and summarize transactions ACCOUNTS
and to prepare data for basic PAYABLE
financial statements.
Listing of all ledger accounts, in
order, with their respective debit TRIAL BALANCE
or credit balances. Assets
Liabilities
Owner’s Equity
Revenue
Expenses
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AC 101 Prof. Nova Grace Latina
Financial Accounting
SOURCE DOCUMENTS
✓ Identify and describe transactions and events entering the accounting process.
✓ This contains information about the nature and the amounts of the transactions.
✓ These are the basis for the journal entries.
✓ Examples: sales invoices, cash register tapes, official receipts, bank deposit slips,
bank statements, checks, purchase orders, time cards and statement of
account.
THE JOURNAL
✓ The chronological record of the entity’s.
✓ A journal entry shows all the effects of a business transaction in terms of debits
and credits.
✓ A journal is called the book of original entry.
SIMPLE AND COMPOUND ENTRY
In a simple entry, only two accounts are affected – one account is debited and the
other account credited.
Some transactions require the use of more than two accounts. When three or more
accounts are required in a journal entry, the entry is referred to as compound entry.
TRANSACTION ANALYSIS (STEP 1)
The analysis of transactions should follow these four basic steps:
1. Identify the transaction from source documents.
2. Indicate the accounts – either assets, liabilities, equity, income or expenses –
affected by the transaction.
3. Ascertain whether each account is increased or decreased by the transaction.
4. Using the rules of debit or credit, determine whether to debit or credit the
account to record its increase or decrease.
TRANSACTIONS ARE JOURNALIZED (STEP 2)
After the transaction or event has been identified and measured, it is recorded in the
journal. The process of recording a transaction is called journalizing.
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AC 101 Prof. Nova Grace Latina
Financial Accounting
Illustration:
May 1
Esterlina Gevera is a social entrepreneur from the South. She is into a lot of interesting
causes. Her fine taste is preeminent such that she is considered an authority in planning
weddings. Upon the advice and prodding of an esteemed colleague, Gloria Detoya,
Gevera decided to organize her wedding consultancy. She invested P250,000 into this
entity.
Analysis
Initial Investment
Assets increased. Owner's equity increased.
Journal Entry
Dr. Cr.
Cash (A) 250,000
Gevera, Capital (OE) 250,000
_____________________________________________________________________________________
May 1
Rented office space and paid two months' rent in advance, P8,000.
Analysis
Rent Paid in Advance
Assets increased. Assets decreased.
Journal Entry
Dr. Cr.
Prepaid Rent (A) 8,000
Cash (A) 8,000
_____________________________________________________________________________________
May 2
Esterlina Gevera issued a promissory note for a P210,000 loan from Metrobank. This
availment will be used for the acquisition of a service vehicle. The note carries a 20%
interest per annum. The arrangement with the bank is that both the interest and the
principal are payable in full in one year.
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AC 101 Prof. Nova Grace Latina
Financial Accounting
Analysis
Note Issued for Cash
Assets increased. Liabilities increased.
Journal Entry
Dr. Cr.
Cash (A) 210,000
Notes Payable (L) 210,000
_____________________________________________________________________________________
May 2
Hired an office assistant and an account executive each with a P7,800 monthly salary.
Or, each is to receive P300 per day for the 26-day work month. No entry is necessary at
this point. They started work immediately.
_____________________________________________________________________________________
May 2
Acquired service vehicle for P420,000.
Analysis
Service Vehicle Acquired for Cash
Assets increased. Assets decreased.
Journal Entry
Dr. Cr.
Service Vehicle (A) 420,000
Cash (A) 420,000
_____________________________________________________________________________________
May 4
Paid Prudential Guarantee and Assurance, Inc. P14,400 for a one-year comprehensive
insurance coverage on the service vehicle.
Analysis
Insurance Premiums Paid
An asset increased. Another asset decreased.
Journal Entry
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AC 101 Prof. Nova Grace Latina
Financial Accounting
Dr. Cr.
Prepaid Insurance (A) 14,400
Cash (A) 14,400
_____________________________________________________________________________________
May 5
Acquired office equipment from Fair and Square Emporium for P60,000; paying P15,000
in cash and the balance next month.
Note: A compound entry is needed for this transaction.
Analysis
Office Equipment Acquired on Account
Assets increased. Assets decreased. Liabilities increased.
Journal Entry
Dr. Cr.
Office Equipment (A) 60,000
Cash (A) 15,000
Accounts Payable (L) 45,000
_____________________________________________________________________________________
May 8
Purchased supplies on credit for P18,000 from San Jose Merchandising.
Analysis
Supplies Purchased on Account
Assets increased. Liabilities increased.
Journal Entry
Dr. Cr.
Supplies (A) 18,000
Accounts Payable (L) 18,000
_____________________________________________________________________________________
May 9
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AC 101 Prof. Nova Grace Latina
Financial Accounting
Paid San Jose Merchandising P10,000 of the amount owed.
Analysis
Accounts Payable Partially Settled
Assets decreased. Liabilities decreased.
Journal Entry
Dr. Cr.
Accounts Payable (L) 10,000
Cash (A) 10,000
_____________________________________________________________________________________
May 10
Coordinated and finalized simple bridal arrangements for three couples and collected
fees of P8,800 per couple. Services include prospecting and selecting the church and
reception location, couturier, caterer, car service, flowers, souvenirs and invitations.
Analysis
Revenues Earned and Cash Collected
Assets increased. Owner's equity increased.
Journal Entry
Dr. Cr.
Cash (A) 26,400
Consulting Revenues (OE:I) 26,400
_____________________________________________________________________________________
May 13
Paid salaries, P6,600. The entity pays salaries every two Saturdays
Analysis
Salaries Paid
Assets decreased. Owner's equity decreased.
Journal Entry
Dr. Cr.
Cash (A) 26,400
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AC 101 Prof. Nova Grace Latina
Financial Accounting
Consulting Revenues (OE:I) 26,400
_____________________________________________________________________________________
May 15
The entity is earning additional revenues by referring consulting clients to friendly hotels,
caterers, printers, and couturiers. Received P10,000 advance fees for three clients
referred.
Analysis
Unearned Revenues Collected
Assets increased. Liabilities increased.
Journal Entry
Dr. Cr.
Cash (A) 10,000
Unearned Referral Revenues (L) 10,000
_____________________________________________________________________________________
May 19
Coordinated and finalized elaborate bridal arrangements for three couples and billed
fees of P12,000 per couple. Additional services include documents preparation,
consultation with a feng shui expert as to the ideal wedding date for prosperity and
harmony, provision for limousine service and honeymoon trip.
Analysis
Revenues Earned on Account
Assets increased. Owner's equity increased.
Journal Entry
Dr. Cr.
Accounts Receivable (A) 36,000
Consulting Revenues (OE:I) 36,000
_____________________________________________________________________________________
May 25
Gevera withdrew P14,000 for personal expenses.
Analysis
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AC 101 Prof. Nova Grace Latina
Financial Accounting
Withdrawal of Cash by Owner
Assets decreased. Owner's equity decreased.
Journal Entry
Dr. Cr.
Gevera, Withdrawals (OE) 14,000
Cash (A) 14,000
_____________________________________________________________________________________
May 27
Paid salaries, P7,200.
Analysis
Salaries Paid
Assets decreased. Owner's equity decreased.
Journal Entry
Dr. Cr.
Salaries Expense (OE:E) 7,200
Cash (A) 7,200
_____________________________________________________________________________________
May 30
Received P24,000 from two clients for services billed last May 19.
Analysis
Accounts Receivable Partially Collected
An asset increased. Another asset decreased.
Journal Entry
Dr. Cr.
Utilities Expense (OE:E) 1,400
Utilities Payable (L) 1,400
_____________________________________________________________________________________
May 30
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AC 101 Prof. Nova Grace Latina
Financial Accounting
Received P24,000 from two clients for services billed last May 19.
Analysis
Accounts Receivable Partially Collected
An asset increased. Another asset decreased.
Journal Entry
Dr. Cr.
Cash (A) 24,000
Accounts Receivable (A) 24,000
_____________________________________________________________________________________
May 31
Settled the electricity bill of P3,000 for the month.
Analysis
Expenses Incurred and Paid
Assets decreased. Owner's equity decreased.
Journal Entry
Dr. Cr.
Utilities Expense (OE:E) 3,000
Cash (A) 3,000
THE LEDGER
A grouping of the entity's accounts is referred to as a ledger. Although some firms may
use various ledgers to accumulate certain detailed information, all firms have a general
ledger. A general ledger is the "reference book" of the accounting system and is used to
classify and summarize transactions, and to prepare data for basic financial statements.
The accounts in the general ledger are classified into two general groups:
1. balance sheet or permanent accounts (assets, liabilities and owner's equity).
2. income statement or temporary accounts (income and expenses). Temporary or
nominal accounts are used to gather information for a particular accounting period. At
the end of the period, the balances of these accounts are transferred to a permanent
owner's equity account.
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AC 101 Prof. Nova Grace Latina
Financial Accounting
CHART OF ACCOUNTS
A listing of all the accounts and their account numbers in the ledger is known as the chart
of accounts. The chart is arranged in the financial statement order, that is, assets first,
followed by liabilities, owner's equity, income and expenses. The accounts should be
numbered in a flexible manner to permit indexing and cross-referencing.
EXAMPLE
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AC 101 Prof. Nova Grace Latina
Financial Accounting
POSTING (Step 3)
Posting means transferring the amounts from the journal to the appropriate accounts in
the ledger. Debits in the journal are posted as debits in the ledger, and credits in the
journal as credits in the ledger.
refer to Excel file for Ledger and T-Accounts.
LEDGER ACCOUNTS AFTER POSTING
At the end of an accounting period, the debit or credit balance of each account must
be determined to enable us to come up with a trial balance.
• Each account balance is determined by footing (adding) all the debits and credits.
• If the sum of an account's debits is greater than the sum of its credits, that account
has a debit balance.
• If the sum of its credits is greater, that account has a credit balance.
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AC 101 Prof. Nova Grace Latina
Financial Accounting
TRIAL BALANCE (Step 4)
The trial balance is a list of all accounts with their respective debit or credit balances. 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.
The procedures in the preparation of a trial balance follow:
1. List the account titles in numerical order.
2. Obtain the account balance of each account from the ledger and enter the debit
balances in the debit column and the credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.
The trial balance is a control device that helps minimize accounting errors. When the
totals are equal, the trial balance is in balance. This equality provides an interim proof of
the accuracy of the records but it does not signify the absence of errors.
LOCATING ERRORS
An inequality in the totals of the debits and credits would automatically signal the
presence of an error. These errors include:
1. Error in posting a transaction to the ledger:
• an erroneous amount was posted to the account. 0 a debit entry was posted
as a credit or vice versa.
• a debit or credit posting was omitted.
2. Error in determining the account balances:
• a balance was incorrectly computed.
• a balance was entered in the wrong balance column.
3. Error in preparing the trial balance:
• one of the columns of the trial balance was incorrectly added.
• the amount of an account balance was incorrectly recorded on the trial
balance. 0 A debit balance was recorded on the trial balance as a credit or
vice versa, or a balance was omitted entirely.
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