MGT 111 - Principles of Accounting Instructor: HDMiranda

CHAPTER 3

RECORDING BUSINESS TRANSACTIONS

DOUBLE-ENTRY SYSTEM

The double-entry accounting system is based on the principles of duality, which means that for every change in
financial set up (transaction), there would always be two-sided effect to the extent of the same amount in the accounting
books. Each transaction must be recorded with at least one debit and one credit, in such a way that the total peso amount
of debits and the total peso amount of credits equal each other. Because of the way it is designed, the whole system is
always in balance.

ACCOUNT AND BOOK OF ACCOUNTS

An Account is an accounting form of record in which the effect of similar business transactions are grouped or
classified. This is an accounting device to record the increases and decreases of a specific asset, liability, owner’s
equity, revenue and expenses.

T- ACCOUNT

An account may be expressed in a “T” device form where the debits are recorded on the left-hand side and the
credits are recorded on the right-hand side of the letter T.

Parts of T-Account

1. Title – describes the asset, liability, or owner’s equity account.

2. Debit – the left-hand side; to record the value received in an economic transaction.
3. Credit – the right-hand side; to record the value parted with in an economic transaction.

CHART OF ACCOUNTS

A chart of accounts is a list of all the accounts of the business and their corresponding account numbers. Usually,
it is arranged in the financial statement order – that is, asset accounts first, followed by liability accounts, owner’s equity,
revenues and expenses.

Recording Process (Journalizing and Posting)

RECORDING PROCESS
FLOWCHART
GENERAL JOURNAL
1 2 Journalize the effects in the
Description PR Dr. Cr.
DOCUMENTS journal through journal entries.

Receipts
3 GENERAL LEDGER Post the debit and credit values
Invoices
Debit Credit in the journal to their respective
accounts in the ledger.

4 WORKING PAPER
Organize the information in the
Unadjusted Adjustments
ledger using the working paper.
BOOK OF ACCOUNTS:

5 1
FINANCIAL REPORTS Formalize into a good form
financial reports.
 1. Journal

It is a chronological record of transactions also known as the “book of original entry”. Although all
transactions could be recorded in the general journal, it is more efficient to use special journals in recording a
large number of like transactions. Special journals that enterprises usually use are:

a. Sales Journal – Only sales of merchandise on account are recorded.

b. Cash receipts journal – All types of cash receipts are recorded.
c. Purchase journal – Used to record all purchases on account (merchandise, equipment and supplies).
d. Cash disbursement journal – All payments of cash for any purpose are recorded.

Journalizing – the process of recording a transaction in a journal.

Journal Entries – the accounting record written in the journal. A journal entry consists of debit account(s) and
credit account(s) with their respective values.

Classification of journal entry

1. Simple journal entry – composed of one debit and one credit account.
2. Compound journal entry – an entry with more than one debit or more than one credit or both.

THE GENERAL JOURNAL

The description column is for recording
the account titles to be debited and The debit and credit money
The date column is for the credited and identifying the source columns are used to record the
recording the date on which documents and nature of transaction. amounts of the transaction.
the transaction is journalized.
Page 1

Post
Date Description Ref. Debit Credit
2015
June 1 Cash 101 2 0 0 0 0 0 -
Juan Cruz, Capital 301 2 0 0 0 0 0 -
To record cash investment by the
owner in his business.

Leave one blank line

between each journal PR stands for posting
entry. reference. This column is used The peso sign and the
to cross-reference the account to decimal point are never
The credit account should be the general ledger. recorded in the general
indented by about ½ inch journal (and ledger).
from the debit.

Steps in journalizing a transaction

1. Enter the date.

2. Enter the debit account title and its amount
3. Enter the credit account title and its amount
4. Enter the explanation.

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 2. Ledger

Accounts and their related amounts as recorded in the journal are posted and summarized periodically. It
is also known as the “book of final entry”.

Kinds of ledgers:

a. General ledger – Includes all the accounts appearing on the financial statements.
b. Subsidiary ledgers – Affords additional detail in support of certain general ledger accounts.

Account number is assigned

Name of the account (Cash, to each account title to
Item describes the nature of Accounts Receivable, etc.) facilitate recording and cross-
the transaction in which the
referencing.
accounts is involved.
CASH Account No. 101
Post Post
Date Items Ref. Debit Date Items Ref. Credit
2015
June 1 Investment 1 200 000

PR identifies the page

Date identifies when the number of general journal The transaction columns
transaction happened. from which the information are used for recording the
was taken. amount of transaction from
the general journal.

JUAN CRUZ, CAPITAL Account No. 301

Post Post
Date Items Ref. Debit Date Items Ref. Credit
2015
June 1 Investment 1 200 000

Steps in Posting from the Journal to the Ledger

In the Ledger:
1. Locate the corresponding account in the ledger.
2. Transfer the following information from the journal to the respective account ledger:
 Date
 Explanation
 Debit or credit column
3. Place the page of the journal where the information transferred is located in the post-reference column of
the ledger account.

In the Journal:
4. Place in the post-reference column of the journal the number of the account as indicated in the ledger.

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TRIAL BALANCE

A trial balance is a device used to periodically test the equality of debits and credits as recorded in the ledger
accounts. The device is a presumptive proof of recording correctly the account’s debits and credits.

Steps in preparing a trial balance

1. Determine the balance of each account in the ledger. This is done after posting all the transactions in the
ledger. The debit and credit columns of the accounts are totalled. The process is called pencil footing.
Then, the smaller total is subtracted from the bigger total and the difference represents the balance of the
account.
2. List each ledger account that has a balance, with the debit balances in the left column and the credit
balances in the right column. Accounts are listed in the order they appear in the ledger.
3. Add each column.
4. Compare the total of each column. Normally the two totals are equal.

Illustration 3. Comprehensive Example – AB Design

Arnel Basco opened a portrait studio on December 1, 2015 and completed the following transactions during the
month:

December 1 Began business by depositing P300,000 in the business checking account.

1 Paid two months’ rent in advance for the studio, P40,000.
1 Bought photography equipment in account, P100,000.
1 Purchased office equipment for cash, P50,000.
8 Purchased photography supplies for cash, P30,000.
15 Received cash for portraits, P70,000.
16 Billed customers for portraits, P25,000.
21 Paid for one-half of the photography equipment purchased on December 1, P50,000.
24 Paid utility bill for December, P15,000.
29 Received payment for customers billed on December 16, P12,000.
30 Paid wages to assistant, P10,000.
31 Withdraw cash for personal expenses, P20,000.
31 Received cash for portraits, P22,000.

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 AB Design
Chart of Accounts

Assets
Cash 101
Accounts Receivable 102
Photography Supplies 103
Prepaid Rent 104
Photography Equipment 105
Accumulated Depreciation – Photography Equipment 106
Office Equipment 107
Accumulated Depreciation – Office Equipment 108

Liabilities

Accounts Payable 201

Wages Payable 202
Utilities Payable 203
Owner’s Equity
ArnelBasco, Capital 301
ArnelBasco, Personal 302
Income Summary 303
Revenue
Portrait Revenue 401
Expenses
Wages Expense 501
Utility Expense 502
Supplies Expense 503
Depreciation Expense - Photography Equipment 504
Depreciation Expense - Office Equipment 505
Rent Expense 506

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 GENERAL JOURNAL Page 1
Post
Date Description Debit Credit
Ref.
2015
Dec. 1 Cash 101 3 0 0 0 0 0 -
Arnel Basco, Capital 301 3 0 0 0 0 0 -
To record cash investment by the
owner in his business.

1 Prepaid Rent 104 4 0 0 0 0 -

Cash 101 4 0 0 0 0 -
Paid two months rent.

1 Photography Equipment 105 1 0 0 0 0 0 -

Accounts Payable 201 1 0 0 0 0 0 -
Bought photography equipment
On account.

1 Office Equipment 107 5 0 0 0 0 -

Cash 101 5 0 0 0 0 -
Purchased office equipment for
cash.

8 Photography Supplies 103 3 0 0 0 0 -

Cash 101 3 0 0 0 0 -
Bought photography supplies for
cash.

15 Cash 101 7 0 0 0 0 -
Portrait Revenue 401 7 0 0 0 0 -
Received cash for portraits.

16 Accounts Receivable 102 2 5 0 0 0 -

Portrait Revenue 401 2 5 0 0 0 -
Billed customers for portraits.

21 Accounts Payable 201 5 0 0 0 0 -

Cash 101 5 0 0 0 0 -
Paid for one-half of the
photography
equipment.

24 Utility Expense 502 1 5 0 0 0 -

Cash 101 1 5 0 0 0 -
Paid utilities for December.

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 GENERAL JOURNAL Page 2
Post
Date Description Debit Credit
Ref.
2015
29 Cash 101 1 2 0 0 0 -
Dec.
Accounts Receivable 102 1 2 0 0 0 -
Received partial payment from
customers

30 Wages Expense 501 1 0 0 0 0 -

Cash 101 1 0 0 0 0 -
Paid wages to assistant

31 ArnelBasco, Personal 302 2 0 0 0 0 -

Cash 101 2 0 0 0 0 -
The owner withdrew cash for
personal use.

31 Cash 101 2 2 0 0 0 -
Portrait Revenue 401 2 2 0 0 0 -
Received cash for portraits.

GENERAL LEDGER

CASH Account No. 101

Date Items PR Debit Date Items PR Credit
2015 2015
1 1 300,000 1 1 40,000
Dec. Dec.
15 1 70,000 1 1 50,000
29 2 12,000 8 1 30,000
31 2 22,000 21 1 50,000
189,000 404,000 24 1 15,000
30 2 10,000
31 2 20,000
215,000

ACCOUNTS RECEIVABLE Account No. 102

Date Items PR Debit Date Items PR Credit
2015 2015
16 1 25,000 29 2 12,000
Dec. Dec.
13,000

PHOTOGRAPHY SUPPLIES Account No. 103

Date Items PR Debit Date Items PR Credit
2015
8 1 30,000
Dec.

PREPAID RENT Account No. 104

Date Items PR Debit Date Items PR Credit
2015
1 1 40,000
Dec.
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 PHOTOGRAPHY EQUIPMENT Account No. 105
Date Items PR Debit Date Items PR Credit
2015
1 1 100,000
Dec.

OFFICE EQUIPMENT Account No. 107

Date Items PR Debit Date Items PR Credit
2015
1 1 50,000
Dec.

ACCOUNTS PAYABLE Account No. 201

Date Items PR Debit Date Items PR Credit
2015 2015
21 1 50,000 1 1 100,000
Dec. Dec.
50,000

ARNEL BASCO, CAPITAL Account No. 301

Date Items PR Debit Date Items PR Credit
2015
1 1 300,000
Dec.

ARNEL BASCO, PERSONAL Account No. 302

Date Items PR Debit Date Items PR Credit
2015
31 2 20,000
Dec.

PORTRAIT REVENUE Account No. 401

Date Items PR Debit Date Items PR Credit
2015
15 1 70,000
Dec.
16 1 25,000
31 2 22,000
117,000

WAGES EXPENSE Account No. 501

Date Items PR Debit Date Items PR Credit
2015
30 2 10,000
Dec.

UTILITY EXPENSE Account No. 502

Date Items PR Debit Date Items PR Credit
2015
24 1 15,000
Dec.

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TRIAL BALANCE

AB Design
Trial Balance Always start a trial balance with its
December 31, 2015 heading:

Debit Credit  Name of the business

 The title of the accounting
Cash P 189,000 work
Accounts Receivable 13,000  The date of the trial balance
Photography Supplies 30,000
Prepaid Rent 40,000 The accounts recorded in the trial
Photography Equipment 100,000 balance of AB Design are the open
Office Equipment 50,000 accounts.
Accounts Payable P 50,000
ArnelBasco, Capital 300,000 The footing of the trial balance
ArnelBasco, Personal 20,000 accounts is necessary to check the
Portrait Revenue 117,000 arithmetical correctness of the total
Wages Expense 10,000 sales of the debit and credit
Utility Expense 15,000 ________ balances.

P 467,000 P 467,000

When the trial balance is out-of-balance

If the trial balance totals are not equal, the trial balance is said to be out-of-balance. This is a positive proof of the
existence of one or more errors. The main causes of the errors are the following:

1. Posting of an item to the wrong side of the account;

2. Erroneous copying when transferring a balance from the ledger accounts to the trial balance;
3. Omission of the posting of either a debit or credit entry in the journal;
4. Posting the same amount twice; and/or
5. Wrong addition or subtraction in determining the balance of an account.