Bookkeeping Class for SPUQC - CCD Executive Assistantship

By Jessa Eve P. Litang

Lesson 3 – ACCOUNTING CYCLE, AND DIFFERENT TYPE OF ACCOUNTS

I. Basic Accounting Cycle

1. Collection of business documents as transactions occurred. These business documents
will serve as pieces of evidence for a finished transaction.
2. Recording in the journal book. Journal book is the book of original entry. It is the book
where transactions are first entered.
3. Posting. After all transactions for the month are recorded, a total will be made per account.
The totals will then be transferred to another book called the general ledger. The ledger is
the book of final entry.
4. Preparation of trial balance. The trial balance can be prepared by getting the net balance
an individual account.
5. Preparation of adjustment entries. An adjusting entry is necessary to update an account or
correct an error.
6. Preparation of working paper. Working paper is an accountant’s scratch paper, but as
much as possible, it must neatly be done.
7. Preparation of the financial statements. This includes the income statement, balance
sheet, and the statement of cash flows.
8. Preparation of the closing entries, post-closing trial balance, and reversal entries. As soon
as you finish the financial statement, go back to process number 1. However, if it is the
end of the accounting period, then the following processes must be done:
a. Preparation of the closing entries. Closing entries mean that all nominal
and temporary accounts will be closed to capital account so that the
remaining accounts will be the permanent or the real accounts.
b. Preparation of the post-closing trial balance. Post-closing trial balance is
essential to balance the accounts so that before the start of another
accounting period, the accounts are already balanced.
c. Before we finally open the books for the first transactions to be recorded
in, we still have one optional process and this is the preparation of
reversal entries.
d. We are now ready to start another process following the same process
above.

*The mentioned process here will be tackle in our next lessons.

II. The Five Different Type of Accounts
Below are some accounts commonly used in accounting and their corresponding
interpretation when used as journal entries.

i. Asset Accounts. Assets are classified into current assets and non-current assets.
Current Assets include cash and cash equivalents which are not restricted in use, as
well as other assets expected to be realized in cash, or sold or consumed within the
normal operating cycle of the business or one year, whichever is longer. The following
are the current assets:
1. Cash – includes currencies or coins or negotiable instruments such as bank
checks or a postal money order used as a medium of exchange. Two account
titles could be used instead of one:
Cash on Hand for cash items in the custody of the officer-in-charge or the
owner, and
Cash in Bank for cash deposited in the bank under a current or savings
account.
Cash Equivalents are short term, highly liquid investments such as a three-
month time deposit or a three-month government treasury bill.
2. Marketable securities – these are highly traded in securities such as the
stocks and bonds purchased by the enterprises that are to be held for a short
tem duration. Like the cash equivalents they are usually purchased when the
enterprise has temporary idle or excess cash.
3. Receivables – these are collectibles from customers, clients and other
persons for the goods, services or money given by the business. The account
title to be used are:
Accounts Receivable if only an oral or an implied promise is received from the
client or customer.
Notes Receivable is evidenced by a promissory note issued by the debtor.
4. Other Receivables – are
Interest Receivable when interest is collectible on promissory notes received
from clients and customers, or
Rent Receivable for rent collectible from tenants.
Dividends Receivable is a dividend collectible by a shareholder from a
corporation.
5. Merchandise inventory – is an account title used to represent the stock of
goods available for sale by the business. This is applicable only for a
merchandising business.
6. Prepaid expenses – these represent advance payments made for benefits or
services to be received by the business in the future. Examples of these are
Supplies, Prepaid Insurance, and Prepaid Rent.
7. Contra asset accounts – are deductions from current assets. An example of
this is the Allowance for Bad Debts which represents customers’ accounts
doubtful of collection. This is deducted from accounts receivable to arrive at its
net realizable value.
 Non-current Assets are those assets not included as current assets such as the long
term investments, property, plant and equipment and intangibles. The following are the
examples of property, plant, and equipment:

1. Land – lot or real estate owned and used by the business on which a building
could be constructed.
2. Building – structure used to house the office, store, or factory.
3. Equipment – typewriter, air conditioners, calculator, filing cabinet, computer,
electric fan,, trucks, cars used in the business. Specific titles may be used
such as Office Equipment, Store Equipment, and Delivery Equipment.
4. Furniture and Fixtures – tables, chairs, curtains, lighting fixtures and wall
decors. Specific titles may be used such as Office Furniture and Fixtures, and
Store Furniture and Fixtures.
5. Accumulated Depreciation – contra asset or off-set account representing
expired cost of the plant, property or equipment as a result of usage and
passage of time. This is a deduction from the property, plant and equipment.

ii. Liability Accounts. Liabilities are classified into current liabilities and non-current liabilities.

Current Liabilities are those debts or obligations reasonably expected to be liquidated in the
normal course of the enterprise’s operating cycle or paid within a period of one year by the use
of currents assets or the creation of other current liabilities. The following are examples of
current liabilities:
1. Accounts Payable to trade creditors for purchase of goods or services on
credit supported by the oral or implied promise of the business.
2. Note Payable is a liability supported by a promissory note issued by the
business to the creditor.
3. Loan Payable is a liability to pay a bank or a financing institution for amount of
money borrowed by the business.
4. Utilities Payable is a liability to pay utility companies like PLDT, Meralco and
Manila Water for telephone, electricity and water services received from them.
5. Other Payables include:
Interest Payable which represents additional charge and obligation to pay for
interest-bearing promissory notes issued by the business.
Salaries Payable which represents obligation to pay employees for services
received from them.
Taxes Payable which are obligations due to government for sales, earnings,
gains, and value of property owned/sold by the business.

Non-current Liabilities are long term liabilities or obligations which are payable longer than one year
such as:
1. Note Payable which is issued to the creditor and evidenced by a promissory note.
2. Mortgage Payable which is an obligation secured by the real property of the business.
3. Bond Payable which is a long term promise usually from five to ten or twenty years
supported by a formal contract containing the face value of the bond, the interest rate,
the interest payment date and the maturity date.
iii. Capital Accounts.
1. X, Capital – refers to the capital account of the owner. The letter X represents the
name of the owner. In academic problem, where the name of the owner is given, you
should replace letter X with the name of the owner, as stated in the academic problem.
2. X, Withdrawal - refers to the withdrawal made by the owner. Similar to the capital
account, whenever the name of the owner is given in an academic problem, use the
name of the owner instead of the letter X.

iv. Revenue Accounts.

1. Service income – can be used for companies, which render services in order to earn
an income like the services rendered by: (a) Beauty parlor; (b) Barber shop; (c) Repair
shop.
2. Interest income – company income earned out lending its money or depositing money
with a banking institution.
3. Sales – revenue account for merchandising type of business organization that is used
in selling merchandise.
4. Sales discount – represents cash discount given to customers for setting their
accounts on time.
5. Sales returns – represent actual returns made by the customers due to wrong delivery,
wrong shipment, or defective merchandise.
6. Sales allowances – represent no actual returns but to an allowance given instead, for
the defective merchandise delivered.

v. Expense Accounts.
1. Purchases – are merchandise purchase, which are intended for sales.
2. Purchase discount – is a discount given by merchandisers when you pay your
liabilities on time.
3. Purchase returns – actual returns of merchandise you return to your supplier due to
wrong delivery, wrong shipment, or defective merchandise.
4. Purchase allowances – allowances given by the supplier representing reduction of
price for purchased merchandise due to defects.
5. Salaries and wages – represent the labor payments to employees of the company.
6. Employee benefits – represent the labor payments to the employees other than the
basic payment that are highly discretionary on the part of the employer. Examples are
Bonuses, Uniforms, Meal allowances, 13 th month pay, Vacation and sick leave
benefits.
7. Office supplies expense – represents various office supplies used by the office like
coupon bonds, pencils, ballpoint pen, papers, paper clips, etc.
8. Utilities expense – expenses arising from light, water, and telephone expenses.
9. Rent expense – the rental expenses of the business.
10. Advertising expense – the cost of promotion and advertising the products of the
business for the purpose of improving its sales performance.
11. Insurance expense – represents fire and burglary insurance of the various assets of
the business.
Bookkeeping Class for SPUQC - CCD Executive Assistantship
By Jessa Eve P. Litang

Lesson 4 – ACCOUNT TITLES & CHART OF ACCOUNTS, AND ACCOUNTING EQUATION

I. Account Titles & Chart of Accounts

Learning the preparation of accounting journal entries requires an adequate
knowledge of the different account titles used in accounting.

Account title is a word used to describe the transaction, which is generally

accepted and understood by the generally accepted and understood by the general user of
a financial statement. In actual business environment, account titles can be seen in the
chart of accounts.

The chart of accounts is a list of account titles used by business enterprises to

describe their transactions. It guides the bookkeeper in the recording of transactions. The
number and the nature of accounts depend on the type of business operation.

Example:

LOVEPROJECT CAFÉ TRAVEL AND TOURS

CHART OF ACCOUNTS

Current Assets – 101 to 104

101 Cash
102 Accounts Receivable
102.1 Allowance for Bad Accounts
103 Notes Receivable
104 Office Supplies
Property and Equipment – 201 to 203
201 Cars
201.1 Accumulated Depreciation – Cars
202 Equipment
202.1 Accumulated Depreciation – Equipment
203 Furniture & Fixtures
203.1 Accumulated Depreciation – Furniture & Fixtures
Current Liabilities – 301 to 303
301 Accounts Payable
302 Loans Payable
303 Utilities Payable
Long-term Liabilities – 401 to 402
401 Notes Payable
402 Mortgage Payable
Equity – 501 to 502
501 Gomez, Capital
502 Gomez, Drawings
Revenues – 601
601 Service Income
Expenses – 701 to 706
701 Gas & Oil
702 Rent
703 Repair
704 Salaries
705 Supplies
706 Utilities
II. Accounting Equation

Assets = Liabilities + Capital

Assets are defined as resources controlled by the entity as a result of past transactions or
events and from which future economic benefits are expected to flow to the entity.

Liabilities are the present obligation of the entity arising from past transactions or events,
the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.

Capital is the residual interest in the assets of the entity after deducting all of its liabilities.
The capital account has four components:
1. Investment – the resources that the owner has transferred to his business as a
start up or additional. This may be in the form of cash or tangible assets that can
readily be used in the business, like land, building, furniture, equipment, etc. This
will decrease capital.
2. Withdrawal – the temporary withdrawal of the owner, whether cash or any other
assets of the company for personal use. This will decrease capital.
3. Revenues – increase in economic benefit during the accounting period in the form
of inflow or increase in assets or decrease in liability that result in increase in
equity other than contribution from equity participants. This will increase capital.
4. Expenses – decrease in economic benefit during the accounting period in the form
of an outflow or decrease in assets or increase in liability that results decrease in
equity, other that distribution to equity participants. This will decrease capital.