MEANING OF BUSINESS

Business is an undertaking whereby one sells goods or 3. Corporation - is an artificial being created by operation of
services in exchange for money or its equivalent. law, having the rights of succession and the powers,
From this definition one would understand that basically attributes and properties expressly authorized by law or
the motive of business is to earn profit. The profit of the business is incident to its existence 2. The corporation is a juridical
the measure of its success in its operations. As profit increases, the entity, i.e., created by virtue of law, separate from the
business is able to survive in the industry, as a consequence it could owners who are called the stockholders. Hence, it is the
expand its operations, raise the standards of living of the owner or corporation which enters into a contract, sue and being
owners and even the labor force, and it could contribute to the sued, responsible to all its obligations and earns profits or
country's economic state through payment of taxes. suffers losses.
Example: San Miguel Corporation, RFM Corporation, and Sara Lee
FORMS OF BUSINESS ORGANIZATION Philippines, Inc. Unilever Philippines, Inc.
The forms of business organization are:
1. Sole Proprietorship - "sole" means one, hence only one TYPES OF BUSINESS OPERATIONS
person owns this type of business organization. The owner 1. Service Business - an undertaking for profit whereby one
controls all the operations and management of the renders service to a client or customer for a fee.
business. All the profits will go to the owner himself and in Examples: schools, airlines, parlors, barbershops, repair services,
the event of losses he will solely suffer. This type of exercise of professions like accountancy, consultancy, counseling
business is established for simple and small businesses, and law.
which need small capital to survive.
Example: Beauty Saloon, Dress Shops, and Sari-sari Store
BUSINESS
ORGANIZATION OR PERFORMS OR
2. Partnership - is the type of business organization whereby
ENTITY RENDERS FEE
a contract or agreement is made by two or more persons SERVICES
who bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing
the profits among themselves. 1 The owners are called
partners. They contribute capital and divide profits for 2. Merchandising Business - is also known as "Trading"
themselves. There is no prohibition on the maximum business, which means that goods or merchandise, are
number of partners that may constitute a partnership. bought then sold to the customers for profit.
Obviously, this type must be organized by at least two (2) Examples: bookstore, SM Department Stores, Drug Stores
persons.
Example: consultancy firm, law firm, accounting firm, auditing firm

1 2
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 From the above definitions of accounting the student must
BUSINESS SELL
BUY GOODS/ understand that accounting is both a process and an art. Its
ORGANIZATION GOODS/ PROFIT
MERCHANDISE MDSE.
ultimate objective is to provide the users of financial information
OR ENTITY
that may be used in their decision making.

THE ROLE OF ACCOUNTING IN BUSINESS

3. Manufacturing Business - the type of business operation The functions of accounting in business are very important
whereby raw materials are processed into finished product, because of the need to make business decisions. Before the
then sells the finished products for a price higher than the management of a business can arrive at a reasonable and effective
cost in order to earn profit. decision, it needs financial information regarding the business
Examples: shoe factory, Unilever Philippines, Inc., Procter and operations and its results for a period of time and its financial
Gamble Phils., soap factory and the like. position as of a given date. Likewise, other users of financial
information will rely on the financial report in almost all their
BUSINESS SELL undertakings concerning the business. Some of these undertakings
BUY RAW FINISHED
ORGANIZATION FINISHED are the investments of prospective owners, credit standing
MATERIALS PRODUCTS
OR ENTITY GOODS evaluation, registration with government agencies and payment of
taxes.
Because of essential role of accounting in measuring the
MANUFACTURING PROCESS standing of the business whether it is viable or not, earning or
PROFIT losing, capable of expansion or susceptible to closure and etc.,
accounting is acknowledged as the language of business.

DEFINITIONS OF ACCOUNTING
Accounting is a service activity. Its function is to provide BUSINESS TRANSACTIONS
quantitative information, primarily financial in nature, about Business transaction refers to activity or event taking place in
economic entities that is intended to be useful in making economic business, which is expressed in terms of money. The business
decisions. (Financial Reporting Standard Council) transactions are economic activities that are measured and finally
Accounting is the art of recording, classifying, summarizing reported by accountants through financial reports or statements.
in a significant manner and in terms of money, transactions, and
events which are in part at least of a financial nature, and BASIC FINANCIAL STATEMENTS
interpreting the result thereof. (American Institute of Certified 1. Balance Sheet / Statement of Financial Position
Public Accountants) 2. Income Statement / Statement of Recognized Income /
Accounting is the art of measuring, communicating, and Statement of
interpreting the financial activity of a business. Activities

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 3. Statement of Changes in Equity economic benefits. Requirements in recognition of a
4. Cash Flow Statement LIABILITY
5. Notes to Financial Statements 1. It is probable that an outflow of resources embodying
economic benefits will result from the settlement of a
ELEMENTS OF ACCOUNTING present obligation

1. Assets 2. The amount at which the settlement will take place can
be measured reliably.
2. Liabilities
Examples of Liabilities: Accounts Payable, Notes Payable,
3. Equity Mortgage Payable, Loans Payable How may a liability be settled?
4. Income 1. by payment of cash
5. Expenses 2. by transfer of non-cash asset
3. by providing service/s
THE BASIC ACCOUNTING EQUATION
The basic or the fundamental accounting equation is as
3. OWNER'S EQUITY - the interest of an owner in an enterprise,
follows:
which is the excess of an enterprise's assets over its liabilities.
[ASSETS = LIABILITIES + OWNER'S EQUITY]
Mathematically, owner's equity can be computed as:
This formula presents assets as equal in value to the sum of
[OWNER’S EQUITY = ASSETS - LIABILITIES]
liabilities and the owner's equity. The elements of the accounting
The owner's equity represents the residual interest of the owner
equation are discussed as follows:
over the enterprise or business's economic resources after
1. ASSETS - are resources controlled by the enterprise as a result
deducting economic obligations. It is the interest of those who
of past events and from which future economic benefits are
bear the ultimate risks and uncertainties and receive the ultimate
expected to flow to the enterprise.
benefits of enterprise operations.
Requirements in recognition of an ASSET
RESIDUAL INTEREST= ECONOMIC RESOURCES- ECONOMIC OBLIGATIONS
1. It is probable that the future economic benefits will
flow to the enterprise
4. INCOME- are increases in economic benefits during the
2. The asset has a cost or value that can be measured
accounting period in the form of inflows or enhancements of
reliably.
assets or decreases of liabilities that result in increases in
Examples of Assets: Cash, Accounts Receivables, Office
equity, other than those relating to contributions from equity
Supplies, Tools and Equipment, Vehicle, Land and Building
participants. In the service type business operation which is
the major concern of this course, Accounting 1, the revenue
2. LIABILITIES- is a present obligation of the enterprise arising recognized is termed as
from past events, the settlement of which is expected to result "Service Income". The earnings (revenues) of a service business is
in an outflow from the enterprise of resources embodying generated upon the rendering of services for a fee. Other service

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 entities used the general term "Professional Fees" to denote
income received from rendering professional services to a client. REVENUE - EXPENSES = NET INCOME (NET LOSS)

5. EXPENSES- are decreases in economic benefits during the 1.) If Revenue > Expenses = Net Income
accounting period in the form of outflows or depletions of 2.) If Revenue < Expenses = Net loss
assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity 3. Statement of Changes in Equity - shows the additional
participants. investments made by the owners or stakeholders, as well as
their withdrawals for the period. It complements the balance
COMPONENTS OF FINANCIAL STATEMENTS sheet by showing the changes in financial position, and the
1. Balance Sheet - shows the financial position of the company. income statement by describing the total changes in owner's
The financial position of an enterprise is affected by the equity during the period.
economic resources it controls, its financial structure, its The Statement of Changes in Equity serves as a proof of
liquidity and solvency, and its capacity to adapt to changes in the amount of equity appearing in the Balance Sheet.
the environment in which it operates. It presents three (3)
major categories: a) Assets, b) Liabilities, and c) Owner's Equity. 4. Cash Flow Statement- provides information in assessing how
It presents the financial status of business or enterprise at a well the enterprise is able to generate cash and cash
particular point in time. equivalents and how it uses those cash flows. It analyses
The Balance Sheet reflects the elements that are changes in cash and cash equivalents during a period. It has
directly related to financial position, these are the assets, three categories of information: operating, investing and
liabilities and owner’s equity. financing activities.

2. Income Statement - shows the changes in the financial Operating activities are the main revenue-producing
position of the company. It shows the results of operation of activities of the enterprise that are not investing or
the business or enterprise for a period of time. It presents the financing activities and includes cash received from
revenue, expenses, gains, losses, and net income or net loss customers and cash paid to suppliers and employees.
recognized during the period. It reflects the profitability of the
business. Investing activities are the acquisition and disposal of long-
The Income Statement reflects the elements that are term assets and other investments that are not considered
directly related to the performance, these are the income and to be cash equivalents.
expenses.
Financing activities are activities that alter the equity
capital and borrowing structure of the enterprise.
Net Income (Net Loss) - the excess (deficit) of revenue over
expenses for an accounting period.
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 The Cash Flow Statement serves as a proof of the
amount of cash appearing in the Balance Sheet.
= . + no effect
5. Notes to Financial Statement - explains the items in the four
financial statements above and discloses any information that = no effect +
does not qualify for presentation in the balance sheet and
income statement. These may also be in the form of = no effect +
supplementary schedules and other information that (a)
explains items in the balance sheet and income statement, (b)
discloses the risks and uncertainties affecting the enterprise,
5. no effect = + no effect
and (c) explains any resources and obligations not recognized in
the balance sheet11.
2.

3.
DOUBLE-ENTRY BOOKKEEPING
In accounting each transaction affects at least two items in
the financial accounting records. The double entry system of 4.
recording is based on this principle of duality.
no effect =+
ILLUSTRATION OF DOUBLE-ENTRY SYSTEM IN CONSONANCE WITH THE
BASIC ACCOUNTING EQUATION
no effect = +
The effects of each accounting transaction in the basic
accounting equation may be any of the following:
no effect = no effect +

ASSETS = LIABILITIES + OWNER'S EQUITY

Note that each transaction affects at least two items in the
equation (all items may be affected) and the combination varies.
1. = no effect + no effect These notwithstanding, the equality of the equation must be
maintained always. In accounting, when the "equality" is
2. maintained it is said to be in "balance".

3.

4. 5
SUMMARY OF THE EFFECTS OF TRANSACTIONS TO THE ELEMENTS OF 2.) transfers between an enterprise and its owners,
THE FINANCIAL STATEMENTS 3.) nonreciprocal transfers with other than owners in which
INCREASES IN ASSETS ARISE FROM liabilities arise.
1.) exchanges in which assets are acquired, In exchanges, liabilities increases may be accompanied by
2.) investments of assets in the enterprise by owners, decreases in other liabilities (e.g., a note given on an account
3.) nonreciprocal transfers of assets to an enterprise by other than payable), increases in assets (e.g., purchase on account), or an
owners, expense (e.g., officers salaries incurred but unpaid).
4.) shifts of costs to different asset categories in production, and
occasionally, DECREASES IN LIABILITIES ARISE FROM
5.) increases in amounts ascribed to produced assets. 1.) exchanges in which liabilities are reduced,
2.) transfers between an enterprise and its owners (e.g., debt
Increases in assets sometimes arise from external events converted into capital stock),
other than transfers. 3.) nonreciprocal transfers with other than owners in which
In exchanges asset increases may be accompanied by liabilities are reduced (e.g., forgiveness of indebtedness)
decreases in other assets (e.g., purchase for cash), increases in In exchanges, liability decreases may be accompanied by
liabilities (e.g., purchase on account), or recognition of revenue increases in other liabilities (e.g., a note given on an account
(e.g., sale for cash, service for cash) payable), or revenue (e.g., goods delivered or services rendered to
satisfy a customer prepayment).
DECREASES IN ASSETS ARISE FROM
1.) exchanges in which assets are disposed of, INCREASES IN OWNER'S EQUITY ARISE FROM
2.) withdrawals of assets from the enterprise, 1.) investments in an enterprise by its owners,
3.) nonreciprocal transfers of assets from the enterprise other than 2.) the net result of all revenue and expenses recognized during a
to owners, period (net income)
4.) certain external events other than transfers that reduce the 3.) nonreciprocal transfers to an enterprise from other than
market price or utility of assets, owners (e.g., gifts and donations), and
5.) shifts or allocations of costs of different asset categories or to 4.) external events other than transfers (e.g., revaluation of
expenses in production, and property, plant and equipment)
6.) casualties
In exchanges, asset decreases may be accompanied by DECREASES IN OWNER'S EQUITY ARISE FROM
increases in other assets (e.g., a purchase for cash), decreases in 1.) transfers from an enterprise to its owners,
liabilities (e.g., payment of debt), or increases in expenses. 2.) net losses for a period.

INCREASES IN LIABILITIES ARISE FROM REVENUE ARISES FROM

1.) exchanges in which liabilities are incurred, 1.) exchanges accompanied by increases in assets
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2.) exchanges accompanied by decreases in liabilities (e.g., business usually provide for uncollectible portion of the
unearned revenue) accounts receivable as bad debts or doubtful accounts.
Accounts Receivable P xxx
EXPENSES ARISE FROM Less: Allowance for Bad Debts (xxx)
1.) exchanges Net Realizable Value P xxx
2.) nonreciprocal transfers with other than owners,
3.) external events other than transfers, 5. Notes Receivables - are collectible amounts from the
4.) production customer that are supported by written formal promises to
5.) casualties pay a certain amount on demand or at a certain future
time.
ASSETS 6. Office Supplies Unused - refers to the portion of office
Current Assets - are cash; cash equivalent; assets held for supplies purchased that are still capable of utilization by
collection, sale, or consumption within the enterprise's normal the enterprise in the immediately succeeding accounting
operating cycle; or assets held for trading within the next 12 period. This is classified as "prepayments" or "prepaid
months3. All other assets are noncurrent. The current assets are expense" because the cost has already been paid and has
presented in the order of "liquidity". Liquidity means the future benefits.
characteristic of an asset to be easily converted into cash. 7. Prepaid Rent - refers to advance rental payment/s that will
1. Cash on Hand - refers to coins, currencies, bank drafts, and benefit the business.
customer's checks awaiting deposits that are kept in a safe
deposit box or in a cash box within the enterprise. These PROPERTY, PLANT AND EQUIPMENT- include all tangible assets
cash items must be available for use in the current with an estimated useful life beyond one year, are used in the
operations. conduct of the business, and are not intended for sale in the
2. Cash in Bank - money deposited in a bank which may be a ordinary course of business. Property, plant and equipment are
savings or demand deposits. generally carried at cost less allowance for depreciation.
3. Accounts Receivable - consist of open accounts with 1. Office Equipment - refers to tangible assets that are to be
customers for uncollected revenues, unbilled services used by the business in the office like computers,
already rendered or accrued as long as the revenue has typewriters, facsimile, and the like. These assets must be
been earned. for use by the business for a period of time beyond one
4. Allowance for Bad debts - also termed as "Allowance for year.
Doubtful Accounts". This is a contra-asset account that is 2. Accumulated Depreciation - Office Equipment - refers to
deducted from a principal asset account which is accounts the accumulated portion of the cost of the equipment that
receivable. All the outstanding accounts from the has already of service to the company. All property, plant
customers are not certain to be collected fully, hence the and equipment accounts except land are subject to
depreciation.
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 4. Salaries Payable - obligation of the enterprise to pay its
Depreciation is the systematic allocation of the cost of the employees for their services already rendered to the
depreciable asset over its useful life. Accumulated depreciation business.
account is a contra-asset account because it is deducted from the 5. SSS, PHILHEALTH, Withholding taxes Payable - these are
cost of Depreciable asset in order to get the Net Book Value. obligations due to different agencies or institutions of the
Office Equipment P xxx government such as the Social Security System and Bureau
Less: Accumulated Depreciation- of Internal Revenue.
Office Equipment ( xxx) 6. Rent Payable - obligation of the enterprise as the lessee of
NET BOOK VALUE P xxx the premises to pay the lessor, the owner of the place
3. Office Furniture - refers to tangible assets that are being rented.
necessary furnishings of an office such as office tables, 7. Other Payables - other obligations of the business that
chairs, counters, and cabinets. must be settled within one year.
4. Accumulated Depreciation - Office Furniture - is a contra -
asset account that is deducted from the cost of Office NONCURRENT LIABILITIES – are liabilities which do not qualify as
Furniture. It represents the expired allocated cost that current ones, or those debts and obligations that are due to be
already served the enterprise. settled beyond one year and/or to be settled by payment of non-
current assets.
LIABILITIES 1. Long-term Notes Payable - notes payable that are due after
CURRENT LIABILITIES are those to be settled within the enterprise's one year.
normal operating cycle or due within 12 months, or those held for 2. Mortgage Payable - obligations which are secured by a
trading, or those for which the entity does not have an mortgage of a real estate (land and/or building).
unconditional right to defer payment beyond 12 months. Other
liabilities are noncurrent4. OWNER'S EQUITY
1. Accounts Payable - liability representing the amount owed 1. Owner's Equity - is the account used to reflect the equity of
to a creditor usually arising from the purchase of goods, the proprietor in the business. It refers to the owner's
materials or supplies. investment in the enterprise.
2. Notes Payable - a liability evidenced by a formal promise to 2. Owner's Drawings - this account is used to refer to
pay written in a note. withdrawals by the proprietor of some earnings of the
3. Unearned Service Fees - payments for services that are business for personal use.
received in advance from the client's but the enterprise or 3. Income and Expense Summary - is a temporary account
business has not yet rendered the services. used to summarize the effects of revenues/income and
expenses to the equity accounts of the proprietor.

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8
REVENUES 7. Representation and Entertainment - costs incurred in
1. Service Income - refers to revenue account in a service-type accommodating the customers or clients. Also included are
business organization. It reflects the gross earnings of the the costs when officers or employees represent the
enterprise before all expenses of operations are deducted. business in official transactions.
2. Other Income - other income earned by the business which 8. Depreciation Expense - refers to the portion of the cost of
is not directly related with its main operations such as depreciable property that is charged against current
interest income, rental income, and commission income. operations.
9. Doubtful Accounts Expense - refers to the amount of
EXPENSES account receivables that is estimated to be uncollectible
The caption "Operating Expenses" is often used. The operating and is charged against current year's operations.
expenses for service-type business operations include all costs of 10. Insurance Expense - refers to the premium chargeable to
services that are used or consumed in the operations of the current year's operation on fire insurance coverage, motor
business. vehicles insurance coverage and other insurance plans.
1. Salaries Expense - refers to the cost of service rendered by 11. SSS, PHILHEALTH, EC Expenses - refers to the contribution
the employees of the business. It may include the cost of of the enterprise as the employer of the employees in the
living allowances, 13th month pay, and other employee Social Security System, PHILHEALTH and Employees
fringe benefits. Compensation.
2. Rent Expense - refers to the cost of renting office space 12. Miscellaneous Expenses - refers to other costs in relation to
used by the business in its operations. the conduct of the business operations that are normally
3. Supplies Expense - refers to the cost of office stationery, incurred but each of the amounts is not significant enough
coupon bond, envelopes, ball pens and other office to be given accounting recognition individually. These
supplies that are already used by the business. amounts are grouped together and are called
4. Utilities Expense - refers to the cost of light and water and "miscellaneous expenses".
telephone services consumed in the business operations.
5. Taxes and Licenses - refers to payments that are required CLASSIFICATION OF ACCOUNTS
by the Bureau of Internal Revenue and the local A. According to Financial Statement Presentation
Municipality or City where the business is located. 1. REAL ACCOUNTS - Balance Sheet accounts
Payments to different government instrumentality as a. assets
regards the proper registration of the business are also b. liabilities
included in this account. c. capital
6. Transportation Expenses - refers to cost incurred by officers 2. NOMINAL ACCOUNTS - Income Statement accounts
and employees for transportation in line with the a. revenues/income
operations, e.g., meeting with the clients. b. expenses

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B. Whether Principal or Auxiliary 1.) OFFICIAL RECEIPTS - An official receipt is a document which
1. PRINCIPAL ACCOUNTS - accounts that can stand alone gives evidence to a transaction involving a receipt of cash. The
e.g., cash, accounts receivable, service income, sales document gives information on the amount of cash received, the
2. AUXILIARY ACCOUNTS - accounts that are aids or person from cash was received, the date of receipt and the reason
subsidiary to the main or principal accounts. for such receipt.
a. adjunct account - added to the principal account 2.) INVOICE - An invoice is a document which gives evidence to a
b. contra account - deducted from the principal transaction involving the rendering of sales or services giving
account information as to the name and address of the customer or client,
the date the sales or services were made, the terms of sales or
e.g., allowance for doubtful accounts, accumulated depreciation
service, the amount and other particulars about such sales or
C. Whether Permanent or Temporary
services. An invoice is called a sales invoice from the point of view
1. PERMANENT - accounts that are not closed at the end
of the seller and a purchase invoice from the point of view of the
of the accounting period
buyer.
2. TEMPORARY - accounts that are closed at the end of the
3.) CASH VOUCHER - A cash voucher is a document which gives
accounting period.
evidence to a transaction involving payment of cash. This
document gives information as to the name and address of the
SUMMARY OF THE RULES OF DEBIT AND CREDIT
payee, the date of payment, the amount paid, and an explanation
A summary of the rules of debit and credit follows: for such payment.
Rule 1: A debit entry increases an asset. 4.) CHECK - A check is prepared whenever payment is to be made
Rule 2: A credit entry decreases an asset. from cash in bank.
Rule 3: A credit entry increases a liability. 5.) STATEMENT OF ACCOUNT - A statement of account is a bill
Rule 4: A debit entry decreases a liability. presented by a creditor requesting payment for sales or services.
Rule 5: A credit entry increases owner's equity. 6.) PROMISSORY NOTE - A promissory note is a written promise
Rule 6: A debit entry decreases owner's equity. made by a maker (debtor) promising to pay the payee (creditor) a
The terms debit and credit are not synonymous with certain sum in money at a fixed or determinable future time.
increase or decrease. They simply refer to the position that the
entries take in an account, which is either the left side or the right ACCOUNTING CYCLE
side. The accounting cycle refers to a series of sequential steps
or procedures performed to accomplish the accounting process. It
BUSINESS PAPERS is referred to as a "cycle" because this is repeated each accounting
The bases of recording transactions in books of accounts period.
are documents called business papers. Some common business The accounting period may be any of the following:
papers are the official receipts, invoices, cash vouchers, checks, 1. Calendar-period - the accounting period starts on January 1 and
statements of accounts, and promissory notes. ends December 31 of the same year.

10
2. Fiscal year - the accounting period starts at any date except the This involves a review of all ledger accounts and the recording of
first calendar date and end one year thereafter. journal entries and postings of adjustments in order to bring all
accounts to correct balances.
8. CLOSING THE BOOKS. This the process of bringing all income
THE DIFFERENT STEPS IN THE ACCOUNTING CYCLE ARE: and expense accounts to a zero balance at the end of the year
1. IDENTIFICATION OF THE MEASURABLE ACCOUNTING EVENTS by transferring their balances to summary account called the
OR income and expense summary.
TRANSACTIONS. 9. PREPARING A POST-CLOSING TRIAL BALANCE. This is a trial
This is the first and foremost step in the accounting cycle which balance prepared after the income and expense accounts have
consists the gathering of financial information through business been closed. Therefore, the post- closing trial balance is a listing
papers or documents and measuring the recordable amounts only of the balances of assets, liabilities, and capital accounts.
thereof. 10. REVERSING ENTRIES. This is the process of reversing certain
2. JOURNALIZATION. This is the process of recording transactions adjusting entries made so that accounting methods used in the
in a book of original entry called the journal. previous years will be maintained in the next year. These
3. POSTING TO THE LEDGER. This is the process of transferring the reversing entries are recorded at the beginning of the next
accounts from the journal to a book of final entry called the accounting period and are optional.
ledger.
4. PREPARING A TRIAL BALANCE. This is the process of taking IDENTIFYING TRANSACTIONS TO BE RECORDED
account balances from the ledger and preparing a list of the From the source documents identify the transactions that call for
debit and credit balances of all accounts. The purpose of an accounting treated, that is, needed to be recorded in the
preparing a trial balance is simply to check the arithmetic business books. Evaluate if the transaction affects the assets,
accuracy of the accounts in the ledger. liabilities, capital, revenue or expenses accounts of the enterprise.
5. PREPARATION OF THE WORKSHEET AND ADJUSTMENTS. A Take note that we follow the double entry system of accounting;
worksheet is prepared in order to facilitate the preparation of hence at least two accounts are affected by each recordable
the financial statements, i.e., the Balance Sheet, Income transaction.
Statement and Statement of Changes in Capital and other
Financial Report. JOURNALIZATION
6. PREPARING THE FINANCIAL STATEMENTS. From the data The first step in the bookkeeping process is journalization.
recorded, classified, and summarized in the above steps, the Bookkeeping refers to the systematic recording of transactions in
financial reports are prepared to include a balance sheet, an the books of the enterprise.
income statement, and a statement of changes in financial JOURNALIZATION is the process of recording transactions
position. and events in a chronological order in the book of original entry
7. JOURNALIZATION AND POSTINGS OF ADJUSTING JOURNAL called the journal.
ENTRIES. A general journal is a two-column journal with the following
columnar headings: date, particular, F, debit and credit. These
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columnar headings are used to provide the following information 5. The explanation of the transaction must be brief and concise.
about the transaction: This is also placed with an indention of one inch from the
1. Date - This refers to the date when the transaction occurred. extreme left margin of the particulars column.
2. Particulars - This refers to the names or titles of accounts where 6. Usually a line is left free between journal entries.
changes have been caused by the transaction. A brief 7. When recording the peso amounts in the money columns no
explanation of the event is also recorded. commas or period need to be used. The journal money columns
3. F - F stands for 'folio' and is used as a reference guide to indicate are designed with specific boxes for each amount. To illustrate P
the ledger account to which an entry has been posted. 1,234,567.89 will be recorded in the money column as:
4. Debit - This is a money column used to record the debit amount
of the entry. P1 2 3 4 5 6 7 .89

5. Credit - This is also a money column used to record the credit

amount of the entry. 8. A peso sign may be placed before the first amount in a money
column. No other peso sign in necessary as all numbers in money
columns are presumed to be in pesos.
GUIDELINES ON JOURNALIZATION
9. When transactions do not include centavos, the centavo column
The following guidelines will be useful in recording
may be left in blank. Dashes (-) or ciphers (00) may also be used.
transactions in a twocolumn general journal.
1. A complete journal entry includes the following data: the date,
POSTING PROCEDURES
debit and credit accounts, debit and credit amounts, and a brief
1. Based on the first debit entry in the journal, look for the account
explanation of the transaction. When an entry has two or more
in the general ledger.
debits or credits, the entry is a compound journal entry.
2. On the debit side date column, copy the date.
2. The date in a general journal includes the year, month, and day
3. Copy the amount in the debit column.
when the transaction occurred. These complete data are
4. Insert the journal page number in the folio column of the ledger.
recorded on the first entry of every journal page. Unless there is
5. Insert the ledger account number in the folio column of the
a new- year or month on the journal page, it is sufficient to
journal.
record only the day for subsequent entries.
6. Repeat steps 1 to 5 until all the accounts have been posted or
3. The debit account is recorded at the extreme left of the
transferred from the journal to the ledger.
particulars column. If there are two or more debit accounts,
these are all placed alongside the extreme left margin. Steps number 4 and 5 is called cross reference. It facilitates
the tracing of an entry to and from the journal and ledger. Also, if
4. The credit account is recorded with a half-inch indention from
the F columns are both filled up, it signifies that an entry has
the extreme left margin of the particulars column to distinguish
already been posted. The folio column in the journal will be
it from the debit account. All credit accounts are similarly placed.
gradually filled up as the postings are made.
It is important to note that all debit accounts are recorded
before the credit accounts.

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TRIAL BALANCE 6. If the total debits do not equal the total credits, then errors must
At this point we should test the accuracy of our journalizing have been committed. These should be located before ruling and
and posting process by preparing a trial balance. A trial balance is a double ruling the totals. It is therefore advisable that the totals
list of accounts with ledger balances. The following are the steps in should be in pencil figures first and if correct then write over in
determining the balances of the ledgers: ink.
1. Total the debit column and record it in small figures in pencil See to it that the debit totals is equal to the credit totals. If
directly underneath the last debit amount. This is called pencil it is not so, then errors like transferring from the journal to the
footing. It is done in pencil and the figure is small to distinguish it ledger on the wrong side (cash debit was posted to the cash credit)
from the regular entry and to permit erasures if the figure is not or wrong amount (cash debit 40,000 was posted to the debit of the
correct. cash ledger 400,000) or wrong footings or wrong balances were
2. Total the credit column and record it in small pencil figures copied in the trial balance.
directly under the last credit column amount.
3. Extract the balance: if a debit balance, place it in the explanation ADJUSTING THE ACCOUNTS
column debit side in line with the last debit posting in small Adjusting entries are made in order to reflect in the accounts the
pencil figure (see cash ledger); and if a credit balance, place it in information on economic activities that have occurred during the
the explanation column credit side in line with the last credit period covered but have not yet been recorded.
posting. These entries are needed for proper measurement of revenues and
4. You may not pencil foot if there is a single debit or credit amount expenses for the period and the related assets and liability
only. accounts.
The trial balance gives the data needed in preparing the
financial statements. PRINCIPLES SUPPORTING THE NEED FOR ADJUSTMENTS
The following are the accounting principles that form the bases for
OBSERVE THE FOLLOWING RULES IN PREPARING THE TRIAL BALANCE: adjusting the accounts:
1. Heading consists of three lines: First line - Name of the business
Second line - Title of the report 1.) GOING CONCERN - the entity is presumed to continue to exist
Third line - Date unless evidence to the contrary is shown. If management has
2. Account titles are arranged in the following order: Assets, significant concerns about the entity's ability to continue as a
Liabilities, Capital, Revenues and Expenses. going concern, the uncertainties must be disclosed.
3. Only accounts with balances appear in the trial balance. 2.) ACCRUAL BASIS OF ACCOUNTING - revenue is recognized when
4. The peso sign is placed only in the first debit amount, first credit they are earned regardless of the time when cash was received,
amount and on the totals. and expenses are recognized when they are incurred regardless
5. The totals are ruled (one horizontal line drawn under the last of the time when cash was paid.
amounts of the debit and credit columns) and double ruled (two 3.) REPORTING PERIOD - there is a presumption that financial
horizontal lines are drawn under the total figures). statements will be prepared at least annually.

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4.) REVENUE RECOGNITION PRINCIPLE - revenues must be Income Statement; and ninth and tenth money columns,
recognized when earned. Revenues are earned in the Balance Sheet. Each money column for each heading is
accounting period when the services are rendered or goods identified as debit or credit.
sold are delivered. 3.) Enter the account balances in the unadjusted trial balance
5.) EXPENSE RECOGNITION PRINCIPLE - the principle governing the columns and total the amounts. Total debits must equal total
recording of expenses. All the expenses incurred during the credits.
accounting period must be recorded. 4.) Enter the adjusting entries in the adjustments columns and
total the amounts. As each adjustment is entered, a letter or a
6.) MATCHING PRINCIPLE - the expenses of the period must be
number is used to identify the debit entry and the
associated directly or indirectly with the revenue of the period.
corresponding credit entry. Note that the adjustments are not
ITEMS FOR ADJUSTMENTS journalized until after the worksheet is completed and the
In a service-type business there are at most six items for financial statements are prepared.
adjustments. The number of adjusting entries of course depends 5.) Compute each account's adjusted balance by combining the
on the volume of transactions of a particular enterprise. These are unadjusted trial balance and the adjustment figures. Enter the
the following: (1.) Adjustment for Prepaid Expenses; (2) Adjustment adjusted amounts in the adjusted trial balance columns.
for Accrued Income or Revenue; (3) Adjustment for Accrued This procedure of combining horizontally, line by line, the
Expense; (4) Adjustment for Depreciation; (5) Adjustment for Bad amount of each account in the unadjusted trial balance columns
Debts; (6) Adjustment for Unearned Revenues/ Deferred Income. with the corresponding amount in the adjustments columns is
called cross footing.
a.) ADD - when the unadjusted balance is the same as
THE WORKSHEET
the adjustment (debit and debit, or credit and
Worksheet is a tool that facilitates the preparation of the financial
credit).
statements. It is the device that efficiently summarizes the data in
b.) SUBTRACT - when the unadjusted balance is not the
the unadjusted trial balance and the adjustments to come up with
same as the adjustment (debit and credit, or credit
the financial statements on time.
and debit)
6.) Extend the asset, liability and owner's equity amounts from the
adjusted balance columns to the balance sheet columns.
STEPS IN PREPARING A WORKSHEET
Extend the revenue and expense amounts to the income
1.) Write the Worksheet Heading: First line, the name of the
statement columns. Total the balance sheet and income
enterprise; second line, "Worksheet", and the third line, the
statement columns.
period covered.
7.) Note that the initial totals of the income statement and balance
2.) Make the column headings: Account Title; first and second
sheet columns are not equal. The difference between the total
money columns, Unadjusted Trial Balance; third and fourth
credits and the total debits in the income statement is the net
money columns, Adjustments; fifth and sixth money columns,
income or net loss of the period.
Adjusted Trial Balance; seventh and eight money columns,

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 a.) NET INCOME - total credits is greater than total debits. worksheet are recorded in the general journal and posted to the
(Revenues > Expenses) ledger only after the financial statements have been finalized.
b.) NET LOSS - total debits is greater than total credits.
(Revenues < Expenses) \ CLOSING ENTRIES
Closing entries are done at the end of the accounting period in
Enter the net income in the DEBIT column of the income order to bring the temporary accounts into zero balances.
statement and compute the final column totals. The income TEMPORARY accounts are the nominal accounts or the income
statement now has an equal total debits and credits. statement accounts. These are cleared of all outstanding balances
Enter the net loss in the CREDIT column of the income in the general ledger so that at the start of the next accounting
statement and compute the final column totals. The income period the revenue and expense accounts will be opened for
statement now has an equal total debits and credits. recording of new transactions covering the new accounting period.
8.) Enter the net income in the credit column of the balance sheet Aside from income statement accounts other temporary
and compute the final column totals. The balance sheet must accounts are: (1) owner's drawing account, (2) Income and Expense
now have equal total debits and credits. If the result is net loss, Summary account.
enter the amount of net loss in the debit column of the balance Permanent accounts or the balance sheet accounts are not
sheet and get the final column totals. closed because their balances will be carried over to the next
9.) Double rule the column totals. accounting period.

PREPARING THE FINANCIAL STATEMENTS PROCEDURES IN CLOSING THE BOOKS

The financial statements of the enterprise can now be easily 1.) Refer to the worksheet and look at the Income Statement
prepared. By looking at the Income Statement column of the columns.
worksheet copy the balances of the revenues/income and expenses 2.) All credit accounts must be debited and use "Income and
accounts. In making the Balance Sheet, copy all the assets and Expense Summary" account as credit.
liabilities, but before one can complete the Balance Sheet it is 3.) All debit accounts must be credited and use "Income and
necessary to prepare first the Capital Statement. The Capital Expense Summary" account as debit.
Statement will show the changes in the Owner's Equity section of 4.) All the income statement accounts are now closed. Get the
the balance sheet. balance of the "Income and Expense Summary" account.
a.) DEBIT balance = Net Loss
ADJUSTING ENTRIES ARE JOURNALIZED AND POSTED b.) CREDIT balance = Net Income
To meet the timeliness objective in financial statements 5.) Close the "Income and Expense Summary" account to "Owner's,
preparation, it has been customary to the accountants to prepare capital" account.
the financial statements immediately after completing the a.) Net Loss = Debit Owner's, capital
worksheet. The adjustments which are directly entered in the b.) Net Income = Credit Owner's, capital
6.) Close the "Owner's, drawing" account to "Owner's, capital"
account. Credit owner's, drawing and debit owner's, capital.
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 reversed. This is called reversing entries simply because the debit
THE POST CLOSING TRIAL BALANCE entries are credited while the credit entries are debited.
In order to prove the equality of debits and credits after recording
and posting the adjustments and closing entries, the post closing PURPOSES OF REVERSING ENTRIES
trial balance is prepared. This trial balance contains only balance 1.) So that the method used in recording for prepayments and
sheet accounts. The account balances in the Post Closing Trial deferrals will be consistently applied.
Balance must be the same as in the Balance Sheet. 2.) For simplification of entries to be made in the succeeding
The procedure in preparing Post Closing Trial Balance is to accounting period, i.e., entry for payments.
copy all accounts with balances from the general ledger.
REVERSIBLE ADJUSTING ENTRIES
REVERSING ENTRIES 1. Accrued Expense
This is the last step in the accounting cycle. On the first day of the 2. Accrued Income
next accounting period, some adjusting entries need to be
3. Prepaid Expenses under expense method
4. Unearned or Deferred Income under income method

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