Financial Accounting and Reporting Books of Accounts and Double Entry

System

BOOKS OF ACCOUNTS AND DOUBLE ENTRY

SYSTEM

Unit Learning Outcomes:

1. Identify the books of accounts
2. Describe the uses of the books of accounts
3. Explain the rule of debits and credits
4.

Topic 1: BOOKS OF ACCOUNTS

Time Allotment: 2 hours

Learning Objectives:
At the end of the module, you will be able to:
a. identify the uses of the two books of accounts (journal and ledger) to record
business transactions.
b. explain the use of general and special journals to record business transactions
c. discuss the use of general and subsidiary ledgers to record business
transactions.

Activating Prior Learning

Each item below, represents the each part of the general journal. Please identify
them.

GENERAL JOURNAL
 (1)  (2) ( 3) (4)  (5) 
   
         
   
         
   
         

How much score did you get?

Try to assess your performance based on the given scores and their descriptive
value.
5 - Excellent
4 - Good
3 - Fair
0-2 - Poor

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Financial Accounting and Reporting Books of Accounts and Double Entry
System

Congratulations! You did a great job.

Presentation of Content

Books of Account
A business maintains two books of accouns namely:
1. Journal
2. Ledger

Companies initially record transactions and events in chronological order (the order in
which they occur) through jourmnal entries. Thus, the journal is referred to as the book of
original entry. For each transaction the journal shows the debit and credit effects on
specific accounts.
There are two types of journals:

 the general journal and

 the special journal.
The general journal is the most basic journal. Typically, a general journal has spaces for
dates, account titles and explanations, references, and two amount columns. The journal
makes several significant contributions to the recording process:
• It discloses in one place the complete effects of a transaction.
• It provides a chronological record of transactions.
• It helps to prevent or locate errors because the debit and credit amounts for each entry
can be easily compared.

Figure 5.1: The general Journal

The special journals. Some businesses encounter voluminous quantities of similar and
recurring transactions which may create congestion if these transactions are recorded
repeatedly in a single day or a month in the general journal. In order to facilitate efficient
and practical recording of similar and recurring transactions, a special journal is used.
The following are the commonly used special journals:

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Financial Accounting and Reporting Books of Accounts and Double Entry
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• Cash Receipts Journal – used to record all cash that has been received
• Cash Disbursements Journal – used to record all transactions involving cash payments •
Sales Journal (Sales on Account Journal) – used to record all sales on credit (on account)
• Purchase Journal (Purchase on Account Journal) – used to record all purchases of
inventory on credit (or on account)

Examples:
1. You sold a homemade milktea to a customer who promise to pay nextweek.
 This transaction involves a sales on account and thus should be recorded
in the sales journal
2. You sold a milktea to a friend who immediate paid the sales price
 This transaction involves the receipt of cash sales and thus be
recorded in the cash receipts journal
3. You purchased ingrients from a supplier and agreed to pay your account
next month.
 This transaction involves the purchase on account and thus be
recorded in th purchases journal
4. You purchased supplies from a store and paid the items immediately.
 This transaction involves a cash payments and thus be recorded in
the cash disbursement journal

5. You received a utility bill to be settled next week.

 This transaction cannot be recorded in the special journals
therefore, it is recorded in the general journal
THE LEDGER
The ledger refers to the accounting book in which the accounts and their related amounts
as recorded in the journal are posted periodically. The ledger is also called the ‘book of
final entry’ because all the balances in the ledger are used in the preparation of financial
statements. This is also referred to as the T-Account because the basic form of a ledger is
like the letter ‘T’.
There are two kinds of ledgers, namely;

 the general ledger and

 subsidiary ledgers.

The general ledger (commonly referred by accounting professionals as GL) is a

grouping of all accounts used in the preparation of financial statements. The GL is a
controlling account because it summarizes all the activities that have taken place as
recorded in its subsidiary ledger
Figure 5.2: The General Ledger

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Financial Accounting and Reporting Books of Accounts and Double Entry
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A subsidiary ledger is a group of like accounts that contains the independent data of a
specific general ledger. A subsidiary ledger is created or maintained if individualized data
is needed for a specific general ledger account. Knowing only the total balance of your
receivable or payable is not sufficient. You should also have the their individual account
details. An example of a subsidiary ledger is the individual record of various receivables
to customers. The total amount of these subsidiary ledgers should equal the balance in the
Accounts Receivable general ledger.
Figure 5.3: Sample Subsidiary Ledger

Accounts Receivable
Subsidiary Ledger
Customer :
Customer No:
Address:
Date Item Ref Debit Credit Balance
           
           
           
           
           

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Financial Accounting and Reporting Books of Accounts and Double Entry
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Formats of the Books of Account

Figure 5.4: General Journal Format

Special Journals
Figure 5.6 : Cash Receipt Journal

Figure 5.7: Cash Disbursment Journal

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Financial Accounting and Reporting Books of Accounts and Double Entry
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Figure 5.8: Sales Journal

Figure 5.9: Purchases Journal

Figure 5.10 The General Ledger and Subsidiary ledgers

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Financial Accounting and Reporting Books of Accounts and Double Entry
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Application
Congratulations! You have just completed Topic 1.
I prepared some activities for you to refresh your thoughts. These activities
are assessment if you understand that discussions we had. Though this
will not be recorded, it will still form part of your class standing so make
sure to accomplish the tasks given to you. 

The books of accounts

I. Indicate the type of book of accounts that is most relevant to
the items desbribed below:

1. A business purchased supplies on account

2. Sold goods to customers for cash
3. Purchased goods in exchange for a notes payable
4. Purchase equipmet for cash
5. The owner would like to know the amount that he owes to each
supplier
II: Discuss briefly the following
a. Discuss the difference between the general jornal and special
journals
b. Why do a business owner needs to maintain a subsidiary ledger
for some accounts?

Topic 2: Double Entry System

Time Allotment: 90 Minutes

Learning Objectives:
At the end of this topic, you will be able to:
a. Describe the concepts of double entry system
b. Demonstrate the normal balance of each account
c. Apply the rules of debit and credit

Activating Prior Learning

I. Identifying the normal balances: In each account given in column A,
indicate its normal balance in Column B
A. Accounts B. Normal Balances
1 Liability
2 Asset
3 Expense
4 Income
5 Owner’s Equity

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Financial Accounting and Reporting Books of Accounts and Double Entry
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This time, try to assess yourself on how familiar you are about cash and accrual
basis.

How much score did you get?

Try to assess your performance based on the given scores and their descriptive
value.
5 - Excellent
3-4 - Good
0-2 - Poor

Congratulations! You did a great job.

Presentation of Content

Double Entry System

All transactions are recorded in the accounting books using the double
entry system. Under this system, each transaction is recorded in two
parts, the debit and credit.
For each amout that is debited , the same corresponding amout should
be credited. This is to maintain the accounting equation to be balanced
at all times.
Concepts of Duality and Equilibrum
The double entry system involves the use of the concepts of duality and
equilibrium.
Duality concept – transaction has a two fold effects on values; a value
received and a value parted with. This justifies that every transaction is
recorded at least two accounts
Equilibrum concept – each transaction is recorded in terms of equal
debits and creditd. For every peso debited, there is a corresponding peso
credited and vise-versa
Normal Balances of accounts
The normal balance of an account is the side where it creases when
recorded. The following shows the normal balances of the accounts

Type of account Normal balance

1. Asset Debit
2. Liabilities Credit
3. Equity Credit
4. Income credit
5. Expense Debit

Rules of Debits and Credit

To record an account as debit with a normal debit balance means to
increase that account and to credit it means to decrease it. On the other

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Financial Accounting and Reporting Books of Accounts and Double Entry
System

hand, to credit an account with a normal credit balance meansto

increase that account and to debit it means to decrease it.
The summary of the rules of debits and credits can be analyze in the
table below:

Type of account Normal balance Effect on balance Effect on balance

Debited
when when Credited
1. Asset Debit Increase Decrease
2. Liabilities Credit Decrease Increase
3. Equity Credit Decrease Increase
4. Income Credit Decrease Increase
5. Expense Debit Increase Decrease
Remider: Master the rule of debits and credits and its effect to accounts
normal balances in order to make your accounting course easier

Ending Balance of an Account

The difference between the monetary totals of debits and credits to an
accounts represents the ending balance of that account. The minimum
balance of an account is zero. This occurs when the total debit is equal to
the total credits to an account.
Imagine Figure 5.11 is an asset account

           
Assets/Expenses
      Accounts  
      Debit Credit  
      100 40  
Normal Ending
balance 60    
(Reflected on the      
debit side)      
           
           
    Liability/Equity/income Accounts
      Debit Credit  
      150 180  
Normal Ending
balance   30  
(on the credit side)      

Normally, accounts’ ending balances lies on their normal balance side,

that is, if an account’s normal balance is debit, its ending balance must
be in the debit side and vice versa if its normal balance is in the credit
side.The same principle applies when establishing beginning balances
because the ending balance of an account in the current period will
become its beginning balance of the next peiod.
However, there are times that accounts ending balances do not conform
with the ending balance rule, for example an expense credit balance is
greater than its debit balance. This case is known as abnormal balance.
This connotes indication that errors might had been committed .
Knowing the fact that expenses normal balance is debit.

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Financial Accounting and Reporting Books of Accounts and Double Entry
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      Expense Account
      Debit Credit
      100 140
Abnormal Ending
balance   40

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 adjunct
account
Contra accounts are presented in the financial satements as deduction to
their related accounts. Thus contra accounts normal balance is opposite
to its related account. That is, if the account has a normal debit balance,
its contra accounts has normal credit balance and vice-versa in the
opposite case.
Adjunct accounts are presented in the financial statements as addition to
their related accounts. Thefore, adjunct account has the same normal
balance with its related account, that is, if the account has a credit
normal balance, its adjuct account has also a credit normal balance.

Examples of accounts with contra accounts

Accounts Related Accounts

Accounts Receivable Allowance for bad debts
(Contra account)
Building Accumulated depreciation
(Contra account)

The sum of the balaces of an account and its related account (contra or
adjunct) is called carrying amount or (net carrying amount) of that
account.
Example:
On December 31, 2020, the books shows a balance of P100,000 in
Accounts Receivable and it was estimated that P5,000 of the accounts
are incollectible and treated as allowance for bad debts. How much is the
carrying amount of the accounts receivable on December 31, 2020?
Solution:

P100,00
Accounts receivable
0
Less: Allowance for bad
5,000
debts
Net carrying amount P95,000

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Financial Accounting and Reporting Books of Accounts and Double Entry
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Application

Congratulations! You have just completed the topics.

I prepared some activities for you to refresh your thoughts. These activities
are assessment if you understand that discussions we had. Though this
will not be recorded, it will still form part of your class standing so make
sure to accomplish the tasks given to you. 
Imagine youself facing a mirror with both arms raised sideways to
shoulder level. Aswer the following questions
1. Your left arm is
A. Debit
B. Credit
2. If you would be an asset, how would you be increase?
A. Through my left arm
B. Through my right arm
3. If you were a liability, how would you decrease?
A. Through my left arm
B. Through my right arm
4. If you kick your right foot to touch your right hand, what
happens?
A. Addition
B. Subtraction
5. If you clap your hands what happens?
A. Addition
B. Subtraction

Feedback
Name: _________________________ Section: ____________ Score:_______
I. Identification (Rules of Debit/Credit)
Instruction: Indicate how the accounts listed below are increased. (Debit or
Credit)
Accounts Increase by (Debit/Credit)
1. Accumulated Depreciation
2. Sales
3. Inventory
4. Notes Payable
5. Insurance expense
6. Allowance for bad debts
7. Interest income

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8. Equipment
9. Allowance for inventory
write down
10. Intangible asset
11. Depreciation
12. Owner’s Capital
13. Owner’s withdrawal
14. Unearned Revenue
15. Accounts Receivable

II. Identification: Books of accounts

Instruction: Indicate the books of account that is most relevant to the
items described below:
1.Purchase of inventory in Cash basis
2.Collection of accounts receivable
3.Acquisition of land on cash basis
4.This is the book of original entry
5.This book of accounts shows the balances of controlling accounts
6.Payments of accounts payable
7.Sales on account
8.Collection of interest income
9.Recognition of depreciation expense
10. Receipt of utility bills to be settled next weed

III. In column A, indicate whether the account is Asset, Liability, Equity, Income
or Expense. In column B, indicate the normal balance of the account

Account A: (Account Classification) B: Normal Balance

1. Utilities Payable
2. Advances from
cusromers
3. Inventory
4. Equipment
5. Salaries Expense
6. Sales
7. Cash
8. Owner’s capital
9. Notes receivable
10. Owner’s Drawing
11. Depreciation
12. Store Supplies

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Financial Accounting and Reporting Books of Accounts and Double Entry
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13. Building
14. Interest Payable
15. Gains

IV. Multiple Choice

1. Which of the following statements is incorrect regarding the use of the
books of accounts?
a. If an entity uses special journals, its sales on account are recorded
in the sales journal, while its sales on cash basis are recorded in
the cash receipts journal.
b. If an entity uses special journals, it will record only purchases on
account in the purchases journal. It will not record cash
purchases and purchases in exchange for notes payable in the
purchases journal.
c. If an entity uses special journals, all transactions that cannot be
recorded in the special journals are recorded in the general
journal.
d. All the accounts in the general ledger have supporting accounts in
the subsidiary ledger.

2. Journals are used in a recording process called

a. posting.
b. journalizing.
c. journalizationing.
d. postinging.

3. Which of the following is not a special journal?

a. Sales journal
b. Cash receipts journal
c. Purchases journal
d. Subsidiary ledger

4. An increase to an account is recorded

a. in the debit side of that account.
b. in the credit side of that account.
c. in the side of that account that represents its normal balance.
d. beside the account.

5. When two debits get together, the result is

a. addition.
b. deduction.
c. multiplication.
d. love and happiness.

6. Cash is increased through

a. a debit.
b. a credit.
c. ask Mama to make padala.
d. a and c

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7. The minimum balance of an account is zero. In accounting, a negative

balance in an account is referred to as
a. abnormal balance.
b. crazy balance.
c. psychotic balance.
d. LOL balance.

8. At the beginning of the period, a business has a cash balance of

₱20,000. During the period, total cash collections and total cash
payments amounted to ₱100,000 and ₱70,000, respectively. How
much is the ending balance of cash?
a. 10,000
b. 30,000
c. 50,000
d. 70,000

9. You opened up a business and invested ₱5M cash as the business’

initial capital. Which of the following accounts is increased and
therefore debited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Accounts receivable

10.In conjunction with the transaction in #9 above, which of the

following accounts is also increased and therefore credited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Accounts receivable

11.You purchased goods to be held for sale in the ordinary course of

business activities, on cash basis. Which of the following accounts is
increased and therefore debited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Inventory

12.In conjunction with the transaction in #11 above, which of the

following accounts is decreased and therefore credited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Inventory

13.If the transaction in #11 above was made on account, which of the
following accounts is also increased and therefore credited?
a. Cash
b. Accounts receivable
c. Accounts payable
d. Inventory

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Financial Accounting and Reporting Books of Accounts and Double Entry
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14.A customer bought goods from your business, on credit. The

customer orally promised to pay the sale price next week. Which of
the following accounts is increased and therefore debited?
a. Cash
b. Accounts receivable
c. Notes receivable
d. Sales

15.In conjunction with the transaction in #14 above, which of the

following accounts is also increased and therefore credited?
a. Cash
b. Accounts receivable
c. Notes receivable
d. Sales

16.When the customer in #14 above pays the sale price, which of the
following accounts is decreased and therefore credited?
a. Cash
b. Accounts receivable
c. Inventory
d. Sales

17.Your business obtained a ₱1M loan from a financing company. The

financing company made you sign a contract promising to repay the
loan after a year. Which of the following accounts is increased and
therefore credited?
a. Accounts payable
b. Accounts receivable
c. Notes payable
d. Notes receivable

18.To record the transaction in #17 above, which of the following

accounts will you debit?
a. Cash
b. Accounts payable
c. Owner’s equity
d. Inventory

19.The financing company who lent you the loan in #17 above will record
the transaction by debiting which of the following accounts?
a. Accounts payable
b. Accounts receivable
c. Notes payable
d. Notes receivable

20.The financing company in #17 above will credit which of the following
accounts?
a. Cash
b. Accounts receivable
c. Notes payable
d. Notes receivable

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21.You purchased a computer for ₱50,000 cash. To record this

transaction, which of the following accounts will you credit?
a. Cash
b. Computer equipment
c. Owner’s capital
d. Inventory

22.You expect to use the computer in #21 above over the next 5 years. At
the end of Year 1, you will debit which of the following accounts?
a. Depreciation expense for ₱50,000
b. Depreciation expense for ₱10,000
c. Accumulated depreciation – Equipment for ₱50,000
d. Accumulated depreciation – Equipment for ₱10,000

23.Which of the following statements is correct?

a. A contra-asset account is increased through credit.
b. Accounts receivable is increased through credit.
c. Owner’s equity is increased through debit.
d. Accounts payable is decreased through credit.

24.The “Allowance for bad debts” account is a contra account of

a. Cash.
b. Building.
c. Accounts receivable.
d. Equipment.

25.Entity A’s accounts receivable has a balance of ₱10,000. If the related

allowance for bad debts account has a balance of ₱4,000, the carrying
amount of accounts receivable in Entity A’s financial statements is
a. ₱14,000.
b. ₱6,000.
c. ₱4,000.
d. 0.

Reflection

This part of the module will be a time for you to look back, and reflect on
what you have learned from this unit. Though, this will not be checked
and recorded, I would appreciate if you will do this wholeheartedly and
with all seriousness.

Your task!
Open your phone camcorder and imagine that you are a tutor of your other self. Record
yourself as you try to recall the normal balances of each account and state whether it
increases or decreases when debited or credited. During your free time, play the video
oftentimes until you master its content..

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Financial Accounting and Reporting Books of Accounts and Double Entry
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Unit Summary
In this unit, we discussed:

 The two types of boof of accounts , the journa na d the ledger.

 Business transaction are first recorded in the journal
 The effects of the transaction to specific account are posted to the
ledger
 Special journals are used to records recurring transactions that
are similar in nature. Transactions that cannot be recorded in the
special journal is recorded in the general journal
 The general ledger contains all the accounts appearing in the trial
balance
 The subsidiary ledger provides breakdown of the controlling
accounts in the general ledger
 Under the double entry system, accounts are recorded in two
parts, debit and credit
 Assets and expenses have normal debit balances while liabilities,
equity and Income have a credit normal balances
 Normal balance is where accounts increases . For assets and
expenses, debit means to increase and credit is to decrease. While
liability, equity and income, debit means to decrease and credit
means to increase
 Debit and debit as well as credit and credit result to addition
 Debit and credit or vice-versa result to deduction
 A contra account is deducted from its related account when
computing for the carrying amount of the related account. On the
other hand, an adjunct account is added to its related account.

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