Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)

ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018

Ms. Andrea Rose E. Rimorin, CPA, MBA

Unit III - The Accounting Process of a Service Concern

A. Discussion Questions
1. What is an accounting cycle?
The sequence of six steps in the processing of financial transactions (from the time they
occur to their inclusion in financial statements) pertaining to an accounting period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in the
journals, (3) posting debits and credits from journal entries to the general ledger, (4)
adjusting the assets with a trial balance, (5) preparing financial statements, and (6)
closing the temporary accounts.

2. Enumerate the steps in the accounting cycle.

1. Analyzing and recording transactions via journal entries
2. Posting journal entries to ledger accounts
3. Preparing unadjusted trial balance
4. Preparing adjusting entries at the end of the period
5. Preparing adjusted trial balance
6. Preparing financial statements
7. Closing temporary accounts via closing entries
8. Preparing post-closing trial balance

3. What are the normal balances of accounts?

The debit or credit balance that would be expected in a specific account in the general
ledger. For example, asset accounts and expense accounts normally have debit
balances. Revenues, liabilities, and stockholders' equity accounts normally have credit
balances.
ACCOUNT CLASSIFICATION NORMAL BALANCE
Assets Debit
Contra Asset Credit
Liability Credit
Contra Liability Debit
Owner’s Equity Credit
Stockholder’s Equity Credit
Owner’s Drawing or dividend’s account Debit
Revenues (or income) Credit
Expenses Debit
Gains Credit
Losses Debit

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PREPARED BY: Kristine Jane M. Manalastas
Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

4. What is double-entry bookkeeping?

The double entry system of accounting or bookkeeping means that every business
transaction will involve two accounts (or more). For example, when a company borrows
money from its bank, the company's Cash account will increase and its liability account
Loans Payable will increase. If a company pays $200 for an advertisement, its Cash
account will decrease and its account Advertising Expense will increase.

Double entry also allows for the accounting equation (assets = liabilities + owner's
equity) to always be in balance. In our example involving Advertising Expense, the
accounting equation remained in balance because expenses cause owner's equity to
decrease. In that example, the asset Cash decreased and the owner's capital account
within owner's equity also decreased.

5. What are the rules of debit and credit?

(1). Asset accounts:
Normal balance: Debit

Rule: An increase is recorded on the debit side and a decrease is recorded on the credit
side of all asset accounts.

(2). Expense accounts:

Normal balance: Debit

Rule: An increase is recorded on the debit side and a decrease is recorded on the credit
side of all expense accounts.

(3). Liability accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on the debit
side of all liability accounts.

(4). Revenue/Income accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on the debit
side of all revenue accounts.

(5). Capital/Equity accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on the debit
side of all equity accounts.

(6) Contra accounts:

Normal balance: Opposite to the normal account.

An example: Accounts receivable is an asset account that normally has a debit balance.
The allowance for doubtful accounts is a contra account to the accounts receivable and
normally has a credit (opposite) balance.
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PREPARED BY: Kristine Jane M. Manalastas
Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

Rule: If the normal balance of the contra account is debit, the increase will be recorded
on the debit side and the decrease will be recorded on the credit side. If the normal
balance of the contra account is credit, the increase is recorded on the credit side and
the decrease is recorded on the debit side.

6. What is a journal? Why is it called the book of original entry?

In accounting and bookkeeping, a journal is a record of financial transactions in order by
date. A journal is often defined as the book of original entry. The definition was more
appropriate when transactions were written in a journal prior to manually posting them
to the accounts in the general ledger or subsidiary ledger. Manual systems usually had a
variety of journals such as a sales journal, purchases journal, cash receipts journal, cash
disbursements journal, and a general journal.

7. What is journalizing?
Entering of financial data (taken usually from a journal voucher), pertaining to a specific
transaction, in a journal under a double entry bookkeeping system. It involves recording
of five aspects of a transaction: (1) its date, (2) ledger account to be debited and
amount, (3) ledger account to be credited and amount, (4) brief description of the
transaction, and its (5) cross-reference to the general ledger.

8. Describe a compound journal entry.

A compound journal entry is an accounting entry in which there is more than one debit,
more than one credit, or more than one of both debits and credits.

9. What is a ledger? What is Chart of Accounts?

A ledger is a book containing accounts to which debits and credits are posted from
books of original entry

The chart of accounts is a listing of all accounts used in the general ledger of an
organization. The chart is used by the accounting software to aggregate information into
an entity's financial statements. The chart is usually sorted in order by account number,
to ease the task of locating specific accounts. The accounts are usually numeric, but can
also be alphabetic or alphanumeric.

10. What is posting?

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PREPARED BY: Kristine Jane M. Manalastas
Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

Posting in accounting is when the balances in subledgers and the general journal are
shifted into the general ledger. Posting only transfers the total balance in a subledger
into the general ledger, not the individual transactions in the subledger. An accounting
manager may elect to engage in posting relatively infrequently, such as once a month,
or perhaps as frequently as once a day.

11. What is a T-account? What are its parts?

The account has the following format:

The conventional account has the format of the letter T; hence they are often referred
to as T accounts.
By account, we refer to the summary record of all transactions relating to a particular
item in a business.

A ledger is a whole bunch of T-accounts grouped together.

The main ledger is called the general ledger. Virtually all T-accounts in a business fall
under the general ledger.

12. What is a trial balance? What purpose does it serve?

a statement of all debits and credits in a double-entry account book, with any
disagreement indicating an error.

13. What are the steps in preparing a trial balance?

1. List every open ledger account on your chart of accounts by account number. The
account number should be the four-digit number assigned to the account when you
set up the chart of accounts. List your total debits and credits from each general
ledger account. You should have a table with four columns. The columns should be
the account number, account name, debit, and credit.
2. For each open ledger account, total your debits and credits for the accounting
period for which you are running the trial balance. Record the totals for each
account in the appropriate column. If the debits and credits do not equal, then there
is an error in the general ledger accounts. Running a trial balance on a regular basis,
at least monthly, helps you identify any problems quickly and easily and fix them as
soon as they arise. Preparing the trial balance should be tied to the billing cycle of
the company.
3. Do not prepare any adjusting entries yet. The trial balance is prepared before you
make any adjusting entries. The initial trial balance is prepared to detect any
mathematical errors before you make adjusting entries or start closing your books
for the accounting period.
4. If you find you have an unbalanced trial balance, in other words, the debits don't
equal the credits, then you have an error in the accounting process. That error has
to be found and corrected.
5. The first step in finding an error is to simply add the credit and debit columns again
to check your math. If they still don't add up, then subtract the smaller column from

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PREPARED BY: Kristine Jane M. Manalastas
Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

the larger and look for the missing amount in the smaller column. If you find it,
you've found your error.
6. There are other standard techniques to track down an error in a trial balance. If the
debits and credits do not equal, see if the number 2 divides equally into the
difference. If it does, look for an account, look for an account incorrectly in the
column with the larger total that equals half the difference. If you find this, you've
found your error.
7. Another technique is to use the number 9 to find a transposition error. If the
number 9 divides evenly into the difference between the credits and debits, you
have a transposition error. Go back over your credit and debit entries to try to find
your transposition error.

Examples of other errors that could unbalance a trial balance are:

- Not including a ledger account in the trial balance calculation
- Making an error in a compound journal entry
- Putting the wrong ledger accounts in the trial balance columns
- Miscalculating the ledger account amounts
- Posting an accounting journal entry to the wrong general ledger account

Additional Considerations
- If you fail to make a journal entry, it will not show up as an error in the trial balance.
- If you record a financial transaction in an incorrect account, it will not show up as an
error in the trial balance.
- If you transpose the number in the debit column with the number in the credit
column, it will not show up in the trial balance.
- Failing to post an accounting journal entry to the journal ledger will not show up in
the trial balance.

14. Does the equality of the trial balance an assurance of the accuracy of the accounting
records? If No, why?
Equal Doesn't Always Mean Correct

When the total debits and total credits are not equal, it is a clear indication that a
mistake has been committed in the journalizing and/or posting process. An amount
must have been entered incorrectly; hence, must be corrected.

15. Give examples of errors which will not affect the equality of the trial balance.
The trial balance does not guarantee that the records are accurate even if the total
debits and total credits are equal. There are instances when this happens such as:

1. when a transaction was not recorded or not posted (no debit and no credit),
2. when a transaction was recorded or posted twice (total debits and total credits are
both overstated by the same amount),
3. when an account was recorded instead of another account of the same
classification; for example, Supplies was debited instead of Equipment (the total
debits would still be correct since they are both asset accounts).

16. Differentiate transposition and slide errors. Give examples.

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PREPARED BY: Kristine Jane M. Manalastas
Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

When the trial balance doesn't balance try re-totalling the two columns. If this step doesn't
locate the error divide the difference in the totals by 2 and then by 9. If the dissimilarity is
divisible by 2 you may have transferred a debit-balanced account to the trial balance as a credit
or a credit-balanced account as a debit. When the dissimilarity is divisible by 2 you may look for
an amount in the trial balance that is equal to one-half of the difference. Therefore if the
difference is USD 800 look for an account with a balance of USD 400 and see if it is in the wrong
column. If the dissimilarity is divisible by 9 you may have made a transposition error in
transferring a balance to the trial balance or a slide error. A transposition error takes place
when two digits are reversed in an amount (example writing 753 as 573 or 110 as 101). A slide
error takes place when you place a decimal point incorrectly (example USD 1500 recorded as
USD 15.00). Therefore when a difference is divisible by 9 compare the trial balance amounts
with the general ledger account balances to see if you made a transposition or slide error in
transferring the amounts.

B. For each of the transactions given below, indicate the account to be debited or credited on the
spaces provided for.

Debit Credit
1 The proprietor invested cash in the business. D
2 Rent of office space for the month was paid. C
3 Cash was received from various clients for services rendered. D
4 Salaries of employees for the month were paid. C
5 Equipment was purchased on account. D
6 The equipment account was partially paid. C
7 Office supplies were bought on account. D
8 Borrowed money from bank for use in the business and issued a C
promissory note.
9 Additional office supplies were bought on cash basis. D
10 The owner withdrew cash for his personal use. D

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PREPARED BY: Kristine Jane M. Manalastas
Open University - Expanded Tertiary Education Equivalency and Accreditation Program (ETEEAP)
ACCO 2013 - BASIC FINANCIAL ACCOUNTING P1, Second Semester, 2017-2018
Ms. Andrea Rose E. Rimorin, CPA, MBA

C. The transactions of JM's Piano Tuning Enterprise have been recorded directly to the ledger
accounts. Complete the table below by providing the necessary data.
Transactions Account DEBITED Effect Account CREDITED Effect
a 10000 (cash) cash Increase Increase
10000 (Madrid, Capital) capital
b 5000 (Furniture and Equipment) Furniture and Increase Decrease
50000 (cash) equipment Cash
c 500 (rent) Rent Decrease
500 (cash) Cash Decrease
d 1000 (Cash) Cash Increase
1000 (Service Income) Service income Increase
e 3000 (Furniture and equipment) Furniture and Increase
3000 (accounts payable) equpemnt Accounts payable Decrease
f 2000 (Notes payable) Notes payable Decrease
2000 (Accounts payable) (I Accounts payable Decrease
supposed it must only be 2000
instead of 3000)
g 1200 (salary Increase) Salary increase Decrease
(1200 cash) cassh Increase

CASH
NOTES PAYABLE
(a) 10,000 (b) 5,000
(f) 2,000
(d) 1,000 (c) 500
(f) 1,000
(g) 1,200

SALARY EXPENSE FURNITURE AND EQUIPMENT

(g) 1,200 (b) 5,000
(e) 3,000

RENT EXPENSE
(c) 500 MADRID, CAPITAL
(a) 10,000

ACCOUNTS PAYABLE SERVICE INCOME

(f) 3,000 (e) 3,000 (d) 1,000

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PREPARED BY: Kristine Jane M. Manalastas