MODULE 3

THE ACCOUNTING PROCESS:

RECORDING AND CLASSIFYING BUSINESS TRANSACTIONS

Intended Learning Outcomes

After the end of this module, you should be able to:

1. understand the rules of debits and credits and the normal balance of an
account;
2. identify the steps in the accounting cycle;
3. discuss the journalizing process;
4. discuss the posting process; and
5. discuss the preparation of trial balance.

Rules of Debit and Credit

Debits and credits are an integral part of the double-entry bookkeeping system. They are the method
used to record business transactions, and keep track of the elements of the financial statements. Anything
that has a monetary value is recorded as a debit or credit, depending on the transaction taking place. In
accounting, a ledger account (also known as T-account) consists of two sides – a left hand side and a right-
hand side. The left-hand side is commonly referred to as debit side and the right-hand side is commonly
referred to as credit side. In practice, the term debit is denoted by “Dr” and the term credit is denoted by
“Cr”. In the rest of the discussion we shall use the terms debit and credit rather than left and right Below is
an example of a T-account:

CASH
Left Side Right Side
(Debit) (Credit)

When a financial transaction occurs it affects at least two accounts. For example, purchase of machinery
for cash is a financial transaction that increases machinery and decreases cash because machinery comes in
and cash goes out of business. The increase in machinery and decrease in cash must be recorded in the
machinery account and the cash account respectively. As stated earlier, every ledger account has a debit
and a credit side. Now the question is that on which side the increase or decrease in an account is to be
recorded. The answer lies in the learning of normal balances of accounts and the rules of debit and credit.

Normal Balance of Accounts

The understanding of normal balance of accounts helps understand the rules of debit and credit easily.
❖ If the normal balance of an account is debit, we shall record any increase in that account on the debit
side and any decrease on the credit side.
❖ If, on the other hand, the normal balance of an account is credit, we shall record any increase in that
account on the credit side and any decrease on the debit side.

Rules of debit and credit

❖ 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.

❖ 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.

❖ Drawings/Withdrawal account
Normal balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit side of a
drawing account.

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 ❖ 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.

❖ 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.

❖ 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.

❖ 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.
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.

Accounting Cycle
The accounting cycle refers to a series of sequential steps or procedures performed to accomplish the
accounting process. The steps in the cycle and their aims are as follows:

Step 1 Identifying and analyzing business transactions

Aim: To gather information about the transactions through the source documents
and analyze them.
During the Step 2 Transactions are recorded in the journal
accounting
Aim: To record the economic impact of the transactions on the business in a
period
journal.
Step 3 Journalized entries are posted to the ledger
Aim: To transfer the information from the journal to the ledger for classification.
Step 4 Preparation of the trial balance
Aim: To provide a listing to verify the equality of debits and credits in the
ledger.
Step 5 Preparation of the Worksheet including the adjusting entries
Aim: To aid in the preparation of financial statements.
At the end Step 6 Preparation of the Financial Statements
of the Aim: To provide useful information to decision-makers.
accounting Step 7 Journalize and post the adjusting entries
period Aim: To update the balances of the accounts.
Step 8 Journalize and post the closing entries
Aim: To close the temporary or nominal accounts and transfer the net income or
net loss to the owner's equity.
Step 9 Preparation of the post-closing trial balance
Aim: To check the equality of the debits and credits after the closing entries.
At the start Step 10 Journalize and post the reversing entries
of the next Aim: To simplify the recording of certain regular transactions in the next
period accounting period.

On Module 2, the analyzing of business transaction (Step 1) was discussed. Let us recall how it was done.
1. Identify the transaction from the source documents.
2. Indicate the accounts- either assets, liabilities, capital, income or expenses- affected by the
transactions.

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 3. Ascertain whether each account is increased or decreased by the transaction.
4. Using the rules of debit and credit, determine whether to debit or credit the account to record its
increase or decrease.

JOURNALIZING THE BUSINESS TRANSACTIONS (Step 2)

After the transaction has been identified and measured, it is recorded in the journal. The process is called
journalizing. Journalizing is the process of recording the business transaction in the book of original entry
or journal on which the double-entry system is used.
Note that the rules of double-entry system are observed in each transaction:
1. Two or more accounts are affected by each transaction.
2. The sum of the debits equals the sum of the credits.
3. The equality of the accounting equation is always maintained.

The Journal
The journal or the book of original entry is a chronological record of the entity’s transactions. A journal
entry shows all the effects of a business transaction in terms of debits and credits. The nature and volume
of transactions of the business determine the number and type of journals needed. The general journal is the
simplest journal.
The standard contents of the general journal are as follows:
❖ Date. The year and month are not rewritten for every entry unless the year of the month changes or
a new page is needed.
❖ Account Titles and Explanation or Description. The account to be debited is entered at the extreme
left of the first line while the account to be credited is entered slightly indented, usually half inch,
on the next line. Most of the time, all the debited accounts are recorded first before the credit
accounts. A brief description of the transaction is usually made on the line below the credit.
Generally, skip a line after each entry.
❖ P.R. (Posting reference). This will be used when the entries are posted, that is, until the amounts are
transferred to the related ledger accounts. The posting process will be described later.
❖ Debit. The debit amount for each account is entered in this column.
❖ Credit. The credit amount for each account is entered in this column.
Note: No peso sign, comma or decimal point shall be used in the journal when journalizing.

Types of Journal Entries

❖ Simple journal entry- is an entry that contains only one debit and one credit.
❖ Compound journal entry- is an entry that requires use of two or more debits and credits.

Example of Journalizing the Business Transactions

✓ Initial Investment
May 1- Ester Bergonia is a residence of Pangasinan. She is into a lot of interesting causes. Her fine taste is
preeminent such that she is considered an authority in planning weddings. Upon the advice of her friends,
she decided to organize a wedding consultancy named Kasal Mo Consultancy. She invested P250,000 into
this business.
Analysis: Asset increase. Capital increased.
Rules: Increase in assets are recorded by debits. Increase in capital is recorded by credits.
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2017
May 1 Cash 2 5 0 0 0 0 -
Bergonia, capital 2 5 0 0 0 0 -
Initial investment.

✓ Rent Paid in Advance

May 1- Rented office space and paid two month’s rent in advance, P8,000.
Analysis: Asset increase. Asset decreased.
Rules: Increase in assets are recorded by debits. Decrease in assets are recorded by credits.
1 Prepaid rent 8 0 0 0 -
Cash 8 0 0 0 -
Rent paid in advance.

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✓ Note Issued for Cash
May 2- Ester issued a promissory note for a P210,000 loan from the Sta. Maria Bank This availment will
be used for the acquisition of a service vehicle. The note carries a 20% interest per annum, the arrangement
with the bank is that both interest and principal are payable in full in one year.
Analysis: Asset increased. Liabilities increased.
Rules: Increase in assets are recorded by debits. Increase in liabilities are recorded by credits.
1 Cash 2 1 0 0 0 0 -
Notes payable 2 1 0 0 0 0 -
Rent paid in advance.

✓ Hiring of Staff
May 2- Hired an office assistant and an account executive each with a P7,800 monthly salary or each is to
receive P300 per day for a 26-day work month. No entry is necessary at this point since no services are
performed yet. The started work immediately.

✓ Service Vehicle Acquired for Cash

May 4- Acquired service vehicle for P420,000.
Analysis: Assets increase. Assets decreased.
Rule: Increase in assets are recorded by debits. Decrease in assets are recorded by credits.
4 Service Vehicle 4 2 0 0 0 0 -
Cash 4 2 0 0 0 0 -
Acquired service vehicle.

✓ Insurance Premium Paid

May 4- Paid Sunlife Inc. P14,400 for a one-year comprehensive insurance coverage on the service vehicle.
Analysis: An asset increase. Another asset decreased.
Rule: Increase in assets are recorded by debits. Decrease in assets are recorded by credits.
4 Prepaid Insurance 1 4 4 0 0 -
Cash 1 4 4 0 0 -
Paid one-year insurance.

✓ Office Equipment Acquired for Cash and Balance on Account

May 5- Acquired an office equipment from SM Appliance for P60,000; paying P15,000 in cash and the
balance next month.
Analysis: Assets increased. Another asset decreased. Liabilities increase.
Rule: Increases in assets are recorded by debits. Decreases in assets are recorded by credits. Increase in
liabilities are recorded by credits.
5 Office equipment 6 0 0 0 0 -
Cash 1 5 0 0 0 -
Accounts payable 4 5 0 0 0 -
Purchased equipment.

✓ Supplies Purchased on Account

May 8- Purchased supplies on credit for P18,000 from Oscar Merchandising.
Analysis: Asset increased. Liabilities increased.
Rules: Increase in assets are recorded by debits. Increase in liabilities are recorded by credits.
8 Supplies 1 8 0 0 0 -
Accounts payable 1 8 0 0 0 -
Bought supplies on account.

✓ Accounts Payable Partially Settled

May 9- Paid Oscar Merchandising P10,000 of the amount owed.
Analysis: Assets decreased. Liabilities decreased.
Rules: Decrease in assets are recorded by credits. Decreases in liabilities are recorded by debits.
9 Accounts payable 1 0 0 0 0 -
Cash 1 0 0 0 0 -
Paid accounts payable.

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✓ Revenues Earned and Cash Collected
May 10- Coordinated and finalized a simple bridal arrangement for three couples and collected feeds for
P8,800 per couple. Services included prospecting and selecting church and reception location, couturier,
caterer, car services, flowers, souvenirs and invitations.
Analysis: Assets increase. Capital increased by a revenue.
Rules: Increase in assets are recorded by debits. Increase in revenue are recorded by credits.
10 Cash 2 6 4 0 0 -
Consulting revenue 2 6 4 0 0 -
Provided services for cash.

✓ Salaries Paid
May 13- Paid salaries, P6,600. The entity pays salaries every two Saturdays.
Analysis: Assets decreased. Capital decreased by expenses.
Rules: Decreases in assets are recorded by credits. Increase in expenses are recorded by debits.
13 Salaries expense 6 6 0 0 -
Cash 6 6 0 0 -
Paid employee salaries.

✓ Revenue Collected in Advance

May 15- The business is earning additional revenues by referring consulting clients to friendly hotels,
caterers, printers and couturiers. Received P10,000 advance fees for three clients referred.
Analysis: Assets increased. Liabilities increased.
Rules: Increase in assets are recorded by debits. Increase in liabilities are recorded by credits.
15 Cash 1 0 0 0 0 -
Unearned referral revenue 1 0 0 0 0 -
Referral fee collected in
advance.

✓ Revenues Earned on Account

May 19- Coordinated and finalized elaborate bridal arrangements for three couples and billed fees of
P12,000 per couple. Additional services include document preparation, consultation with a feng shui expert
as to the ideal wedding date for prosperity and harmony, provision for limousine service and honeymoon
trip.
Analysis: Assets increased. Capital increased by revenue.
Rules: Increase in assets are recorded by debits. Increase in revenue are recorded by credits.
19 Accounts receivable 3 6 0 0 0 -
Consulting revenue 3 6 0 0 0 -
Billed clients.

✓ Withdrawal of Cash by the Owner

May 25- Ester withdrew P14,000 for personal expenses.
Analysis: Assets decreased. Capital decreased by the drawing.
Rule: Decreases in assets are recorded by credit. Increase in drawing are recorded by debits.
25 Bergonia, drawing 1 4 0 0 0 -
Cash 1 4 0 0 0 -
Owner withdrew cash.

✓ Salaries Paid
May 27- Paid salaries, P7,200.
Analysis: Assets decreased. Capital decreased by expenses.
Rules: Decreases in assets are recorded by credits. Increase in expenses are recorded by debits.
27 Salaries expense 7 2 0 0 -
Cash 7 2 0 0 -
Paid employee salaries.

✓ Expenses Incurred but Unpaid

May 30- Received PLDT telephone bill, P1,400.

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 Analysis: Liabilities increased. Capital decreased by expenses.
Rules: Increases in liabilities are recorded by credits. Increase in expenses are recorded by debits.
30 Utilities expense 1 4 0 0 -
Utilities payable 1 4 0 0 -
Unpaid telephone bill.

✓ Accounts Receivable Partially Collected

May 30- Received P24,000 from two clients for services billed last May 19.
Analysis: An asset increased. Another asset decreased.
Rules: Increases in assets are recorded by debits. Decreases as credits.
30 Cash 2 4 0 0 0 -
Accounts receivable 2 4 0 0 0 -
Partial collection.

✓ Expenses Incurred and Paid

May 31- Settled the electricity of P3,000 for the month.
Analysis: Assets decreased. Capital decreased by expenses.
Rules: Decreases in assets are recorded by credits. Increase in expenses are recorded by debits.
31 Utilities expense 7 2 0 0 -
Cash 7 2 0 0 -
Paid electric bill for the month.

POSTING THE JOURNALIZED ENTRIES (Step 3)

Posting means transferring the amounts from the journal to the appropriate accounts in the ledger. Debits
in the journal are posted as debits in the ledger, and credits in the journal as credits in the ledger, The steps
are illustrated as follows:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the posting reference (PR) column of the ledger.
3. Post the debit figure from the journal as a debit figure in the ledger and the credit figure from the
journal as credit figure in the ledger.
4. Go back to the journal and enter the account number in the posting reference column of the journal
once the figure has been posted to the ledger.

The Ledger
A grouping of the entity’s account is referred to as a ledger. Although some business use various ledgers
to accumulate certain detailed information, all firms have a general ledger. General ledger is the book of
final entry of the accounting system and is used to classify and summarize transaction, and to prepare data
for basic financial statements. The accounts in the general ledger are classified into two general groups:
❖ Balance sheet or real or permanent accounts (assets, liabilities and capital)
❖ Income statement or nominal or temporary accounts (drawing, income and expenses). These
accounts are used to gather data in a particular accounting period. At the end of the period, the
balances of these accounts are transferred to the permanent capital account.
Each account has its own record in the ledger. Every account in the ledger maintains a basic format of
T-account but offers more information. Compared to a journal, a ledger organizes information by account.

Chart of Accounts
A listing of all the accounts and their corresponding account numbers in the ledger is known as the chart
of accounts. The chart is arranged in the financial statement order, that is, assets, liabilities, capital, income
and expenses. The accounts should be numbered in a flexible manner to permit indexing and cross-
referencing.
When analyzing transactions, the accountant refers to the chart of accounts to identify the pertinent
accounts to be increased or decreased. If appropriate account title is not listed in the chart, an additional
account may be added. Take note that each company has their own unique chart of accounts. Presented on
the next page is the chart of accounts of Kasal Mo Consulting.

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 Kasal Mo Consulting
Chart of Accounts
Balance Sheet Accounts Income Statement Accounts
Account # Account Title Account # Account Title
Assets Income
110 Cash 410 Consulting Revenue
120 Accounts Receivable 420 Referral Revenue
130 Supplies Expenses
140 Prepaid Rent 510 Salaries Expense
150 Prepaid Insurance 520 Supplies Expense
160 Service Vehicle 530 Rent Expense
165 Accumulated Depreciation-SV 540 Insurance Expense
170 Office Equipment 550 Utilities Expense
175 Accumulated Depreciation-OE 560 Depreciation Expense- SV
Liabilities 570 Depreciation Expense- OE
210 Accounts Payable 580 Miscellaneous Expense
220 Notes Payable 590 Interest Expense
230 Salaries Payable
240 Ulitilies Payable
250 Interest Payable
260 Unearned Referral Revenue
Capital
310 Bergonia, Capital
320 Bergonia, Drawing
330 Income Summary

Example of Posting a Journalized Transaction

The Journal

Date Description PR Debit Credit

2017
May 1 Cash 110 2 5 0 0 0 0 -
Bergonia, capital 2 5 0 0 0 0 -
Initial investment.

The Ledger

CASH Acct. No. 110

Date Items PR Debit Date Items PR Credit
2017
May 1 250,000-

BERGONIA, CAPITAL Acct. No. 310

Date Items PR Debit Date Items PR Credit
2017
May 1 250,000-

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 7- NAB

Ledger Accounts After Posting
At the end of the accounting period, the debit balance or credit balance of each account must be
determined to enable us to come up with the trial balance.
❖ Each account balance is determined by footing (adding) all the debits and credits.
❖ If the sum of an account’s debit is greater than the sum of the credits, that account has a debit
balance.
❖ If the sum of its credit is greater, that account has a credit balance.

Illustration:
On the previous discussion, there are various cash transactions. Below is the cash ledger showing all
the transactions during the month of May and how the discussed steps after posting be applied.
CASH Acct. No. 110
Date Items PR Debit Date Items PR Credit
2017 2017
May 1 GJ1 250,000- May 1 GJ1 8,000-
2 GJ1 210,000- 4 GJ1 420,000-
10 GJ1 26,400- 4 GJ1 14,400-
15 GJ1 10,000- 5 GJ1 15,000-
30 GJ2 24,000- 10 GJ1 10,000-
22,200- 520,400-
13 GJ1 6,600-
25 GJ2 14,000-
27 GJ2 7,200-
31 GJ2 3,000-
498,200-

This process is known

as footing or pencil
footing.

As indicated on the ledger, the debit side has a greater balance than the credit. Thus, the balance of the
account should be in debit also which is already amounting to P22,200. Below are also some items that
you need to consider when doing the footing:
❖ If the ledger contains on one transaction (such as shown below) no need to perform the footing;
NOTES PAYABLE Acct. No. 220
Date Items PR Debit Date Items PR Credit
2017
May 2 210,000-

❖ If the ledger contains, only one transaction per side, no need to perform the footing for both side
but do the footing only for the balance; or
ACCOUNTS RECEIVABLE Acct. No. 120
Date Items PR Debit Date Items PR Credit
2017 2017
May 19 36,000- May 31 24,000-
12,000-

❖ If the balance is zero, then you may opt to write or not to write the zero balance.
ACCOUNTS RECEIVABLE Acct. No. 120
Date Items PR Debit Date Items PR Credit
2017 2017
May 19 36,000- May 31 36,000-
0

To illustrate the previous example using the T-account, which is used to facilitate the posting of the
transactions. The account numbers and posting reference columns are purposely omitted. The balance of
each account had been determined.

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 8- NAB

 Cash Accounts Payable
2017 2017 2017 2017
May 1 250,000 May 1 8,000 May 9 10,000 May 5 45,000
2 210,000 4 420,000 8 18,000
10 26,400 4 14,400 10,000 63,000
15 10,000 5 15,000 Balance 53,000
30 24,000 10 10,000
13 6,600 Notes Payable
2017
25 14,000 May 2 210,000
27 7,200
31 3,000 Utilities Payable
2 0 17
520,400 498,200 M ay 30 1,400
Balance 22,200

Accounts Receivable Unearned Referral Revenues

2017 2017 2017
May 19 36,000 May 31 24,000 May 15 10,000
Balance 12,000

Supplies Bergonia, Capital

2017 2017
May 8 18,000 May 1 250,000

Prepaid Rent Bergonia, Drawing

2017 2017
May 1 8,000 May 25 14,000

Prepaid Insurance Consulting Revenues

2017 2017
May 4 14,400 May 10 26,400
19 36,000
Balance 62,400

Service Vehicle Salaries Expense

2017 2017
May 4 420,000 May 13 6,600
27 7,200
Balance 13,800

Office Equipment Utilities Expense

2017 2017
May 5 60,000 May 30 1,400
31 3,000
Balance 4,400

PREPARATION OF TRIAL BALANCE (Step 4)

The trial balance is a list of all accounts with their respective debit and credit balances. It is prepared to
verify the equality between the debits and credits in the ledger at the end of each accounting period. The
procedures in the preparation of the trial balance are as follows:
1. List the account titles in numerical order based on the chart of accounts;
2. Obtain the account balance of each account from the ledger and enter the debit balance in the debit
column and the credit balances in the credit column;
3. Add the debit and credit columns; and
4. Compare the total
The trial balance is a control device that helps minimize accounting errors. When the totals are equal,
the trial balance is in balance. This equality provides an interim proof of the accuracy of the records but it

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 9- NAB

does not signify the absence of errors. For example, if the bookkeeper failed to record payment of salaries,
the trial balance column are equal but in reality, the accounts are incorrect since the salaries expense is
understated and the cash is overstated. The trial balance for the illustration is as follows:

KASAL MO CONSULTING
Trial Balance
May 31, 2017

Debit Credit
Cash P 22,200
Accounts Receivable 12,000
Supplies 18,000
Prepaid Rent 8,000
Prepaid Insurance 14,400
Service Vehicle 420,000
Office Equipment 60,000
Accounts Payable P 53,000
Notes Payable 210,000
Ulitilies Payable 1,400
Unearned Referral Revenue 10,000
Bergonia, Capital 250,000
Bergonia, Drawing 14,000
Consulting Revenue 62,400
Salaries Expense 13,800
Utilities Expense 4,400
TOTAL P586,800 P586,800

Locating Errors (Ballada, 2005)

An in equality in the totals of the debits and credits would automatically signal the presence of an error.
These errors include:
1. Error in preparing the trial balance:
❖ one of the columns of the trial balance was incorrectly added.
❖ the amount of an account balance was incorrectly recorded in the trial balance.
❖ a debit balance was recorded on the trial balance as credit or vice versa, or a balance was
omitted entirely.
2. Error in determining the account balances:
❖ a balance was incorrectly computed.
❖ a balance was entered in the incorrect column.
3. Error in posting a transaction to the ledger:
❖ an erroneous amount was posted to the account.
❖ a debit entry was posted as a credit or vice versa.
❖ a debit or credit posting was omitted.

What is the most efficient approach in locating an error? The following procedures when done in
sequence may save considerable time and effort in locating errors:
1. Prove the addition of trial balance columns by adding these columns in the opposite direction.
2. If the error does not lie in the addition, determine the exact amount by which the trial balance is out
of balance. The amount of the discrepancy is often a clue to source of the error. If the discrepancy
is divisible by 9, this suggest either a transposition error (an error of exchanging digits within an
amount) or a slide error (adding or omitting digits in an amount). For example, assume that the cash
account balance is P21,750, but in copying the balance to the trial balance the figures transposed
and written as P21,570. The resulting error amounts to P180 and is divisible by 9. Another common
error is the slide as when P21,750 is copied as P2,175. The resulting discrepancy in the trial balance
will also be divisible by 9.

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 Assume that the office equipment account has a debit balance of P42,000 but erroneously listed in
the credit column of the trial balance. This will cause discrepancy of two times P42,000 or P84,000
in the trial balance total. Such errors as recording the debit in the credit column are common, it is
advisable, after determining the discrepancy in the trial balance totals, to scan the columns for an
equal amount to exactly one-half of the discrepancy. It is also advisable to look over the transactions
for an item of the exact amount of the discrepancy. An error may have been made by recording the
debit side of the transaction and forgetting to enter the credit side.
3. Compare the accounts and amounts in the trial balance with that in the ledger. Be certain that no
account is omitted.
4. Recompute the balance of each ledger account.
5. Trace all postings from the journal to the ledger accounts. As this is done, place a check mark in the
journal and in the ledger after each figure is verified. When the operation is completed, look through
the journal and the ledger for unchecked amounts. In tracing posting, be alert not only for errors in
amount but also for debits entered as credits, or vice versa.

Note that even when a trial balance is in balance, the accounting records may still contain errors. A
balance trial balance simply proves that, as recorded, debits equal credits. The following errors are not
detected by the trial balance:
❖ Failure to record or post a transaction.
❖ Recording the same transaction more than once.
❖ Recording an entry with the same erroneous debit and credit amounts.
❖ Posting a part of a transaction correctly as debit or credit but to the incorrect account.

---- END OF DISCUSSION ---

/NABergonia2018

EXERCISES

Exercise 1
UrTurn Game Lounge, owned by Louie Madilim, has been operating for two years. Below is a series of
transactions. For each transaction, indicate the accounts that should be debited and credited. If no journal
entry is required, write “N/A” in the columns. Use the following account titles: Cash; Accounts Receivable;
Supplies; Prepaid Expenses; Equipment; Patents; Accounts Payable; Notes Payable; Salaries Payable;
Madilim, Capital; Madilim, Drawing; Service Revenues and Operating Expenses.

Transactions Debit Credit

1. Purchased equipment for use in the business; paid one third cash and
gave a note for the balance.
2. Paid cash for salaries.
3. Collected cash for services performed this period.
4. Collected cash for services performed last period.
5. Performed services this period on credit.
6. Paid operating expenses incurred during the period.
7. Incurred operating expenses to be paid next period.
8. Purchased supplies to be used later.
9. Madilim withdraw cash for personal use.
10. Purchased patents for cash.
11. Made a payment on the equipment note in (1); the payment was
part principal and part interest expense.
12. Collected cash on accounts receivable for services previously
performed.
13. Paid cash on accounts payable for expenses previously incurred.
14. On the last day of current period, paid cash for an insurance policy
covering the next 12 months.

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 11- NAB
Exercise 2
New Tipoom started a new business, named Waterboy Exploration Services and completed these
transactions during December 2017:
1 Tipoom invested P48,000 cash in the business.
1 Rented office space and paid P800 cash for the December rent.
3 Purchased exploration equipment for P22,000 by paying P12,000 cash and agreeing to pay the balance
in 3 months.
5 Purchased office supplies by paying P1,500 cash.
6 Completed exploration work and immediately collected P420 cash for the work.
8 Purchased P1,350 of office equipment on credit.
15 Completed exploration work on credit in the amount of P8,000.
18 Purchased P700 of office supplies on credit.
20 Paid cash for the office equipment purchased on December 8.
24 Billed a client P2,400 for work completed; the balance is due in 30 days.
28 Received P5,000 cash for the work completed on December 15.
30 Paid the assistant’s salary of P1,100 cash for this month.
30 Paid P340 cash for this month’s utility bill.
30 Tipoom withdrew P1,050 cash from the business for personal use.

Instructions: (Write it on your notebook)

1. Prepare T-accounts for the following accounts: Cash (101); Accounts Receivable (102); Office
Supplies (103); Office Equipment (104); Exploration Equipment (105); Accounts Payable (201);
Tipoom, Capital (301); Tipoom, Drawing (302); Exploration Revenue (401); Rent Expense (501);
Salaries Expense (502); Utilities Expense (503)
2. Prepare the journal entries of the above transactions.
3. Post the journalized entries on their respective T-accounts.
4. Prepare a trial balance.

Exercise 3
Some of the following errors would cause the debit and credit columns of the trial balance to have unequal
totals. For each of the cases, state whether the error would cause (A) unequal totals in the trial balance or
(B) not. Write the letter before the number of each item.
1. A P5,400 payment for a new typewriter was recorded by a debit to Office Equipment of P540 and
a credit to Cash of P540.
2. A payment of P4,000 to a creditor as recorded by a debit to Accounts Payable of P4,000 and a credit
to Cash of P400.
3. An accounts receivable in the amount of P8,000 was collected in full. The collection was recorded
by a debit to Cash for P8,000 and debit to Accounts Payable for P8,000.
4. An accounts payable was paid by issuing a check for P3,500. The payment was recorded by debiting
Accounts Payable P3,500 and crediting Accounts receivable P3,500.

Exercise 4
The trial balance of PhaYo Computer Services on February 28, 2017 follows:
Account Title Debit Credit
Cash P260,000
Accounts receivable 45,000
Accounts payable P 20,000
PhaYo, Capital 285,000
Total P305,000 P305,000
During March, the business engaged in the following transactions:
1 Borrowed P450,000 from the bank and signed a note payable.
3 Paid cash of P400,000 to a real estate company to acquire land.
5 Performed services for a customer and received cash of P50,000.
7 Purchased supplies on credit, P3,000.
9 Performed services and earned revenues on account, P26,000.
11 Paid P12,000 on account.
13 Paid the following expenses: salaries, P30,000; rent, P15,000; and interest, P4,000.
16 Received P31,000 on account.
26 Received a P2,000 utility bills, due next week.
30 Withdrew P18,000 for personal use.

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 12- NAB
Instructions:
1. Open the beginning balances of the accounts to the ledger.
2. Prepare the complete journal entries of each transactions.
3. Post all the journal entries to their respective ledgers.
4. Prepare the trial balance.
GENERAL JOURNAL Page 1
Date Description PR Debit Credit

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 13- NAB
CASH Acct No. 101 ACCOUNTS RECEIVABLE Acct No. 102
Date Items PR Debit Date Items PR Credit Date Items PR Debit Date Items PR Credit

SUPPLIES Acct No. 103 LAND Acct No. 104

Date Items PR Debit Date Items PR Credit Date Items PR Debit Date Items PR Credit

ACCOUNTS PAYABLE Acct No. 201 NOTES PAYABLE Acct No. 202
Date Items PR Debit Date Items PR Credit Date Items PR Debit Date Items PR Credit

PHAYO, CAPITAL Acct No. 301 PHAYO, DRAWING Acct No. 302
Date Items PR Debit Date Items PR Credit Date Items PR Debit Date Items PR Credit

SERVICE REVENUE Acct No. 401 SALARIES EXPENSE Acct No. 501
Date Items PR Debit Date Items PR Credit Date Items PR Debit Date Items PR Credit

RENT EXPENSE Acct No. 502 UTILITIES EXPENSE Acct No. 503
Date Items PR Debit Date Items PR Credit Date Items PR Debit Date Items PR Credit

INTEREST EXPENSE Acct No. 504

Date Items PR Debit Date Items PR Credit Date Items PR Debit Date Items PR Credit

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 14- NAB
 Account Titles Debit Credit

TOTAL

Exercise 5
Write False if the Statement is true and True if the Statement is false beside the number for each item.
1. The accounting cycle begins with the recording the transactions and ends with the trial balance.
2. Debit means decrease and credit means increase.
3. Transactions are analyzed on the basis of the source documents.
4. Every business transaction affects a minimum of two accounts.
5. A journal entry may include debits to more than one account and credits to more than one account.
6. The double-entry system means that transactions are recorded both in the journal and in the ledger.
7. A credit entry to expense account will increase it.
8. Normally, income accounts have debit balances.
9. An expense may be recognized and recorded although no cash outlay has been made.
10. An account titled Unearned Revenue is a liability account.
11. The T-account is sometimes called as the book of original entry.
12. In some transactions, the accounting equation may not be maintained.
13. Income statement accounts are also known as temporary accounts.
14. Amounts entered on the left side of account, regardless of the title, are called credits.
15. The chart of accounts is a system of organizing and numbering the accounts in the general ledger.
16. A trial balance may balance but may not be correct.
17. Double posting of a transaction causes the debits and credits not to balance.
18. Notes receivable are claims against debtors evidenced by a written promise to pay a certain sum of
money at a definite time to the order of a specified person or to bearer.
19. The process of recording a transaction in a journal is called journalizing.
20. A group of accounts in a ledger is called a chart of accounts.
21. A listing of accounts in a ledger is called chart of accounts.
22. A recording error caused by the erroneous rearrangement of digits, such as writing P627 as P672, is
called transposition.
23. A trial balance with equal debit and credit totals always proves that all transactions have been correctly
journalized and posted to the proper ledger accounts.
24. The sequence of the account titles in a trial balance depends upon the size of the account balances.
25. A transposition error means a posting of a journal entry to wrong ledger account.
26. The journal is a chronological record of the entity’s transactions.
27. The normal balance of any account refers to the side of the account- debit or credit- where decrease is
recorded.
28. Generally, skip a line after each journal entry.
29. Peso sign, comma or decimal point shall be used in the journal when journalizing.
30. The trial balance is a control device that helps minimize accounting errors.

Module 3 ABM 1203 - Fundamentals of Accountancy, Business and Management 1 15- NAB