CHAPTER 3

RECORDING BUSINESS TRANSACTIONS

 Account Titles (as used by sole-proprietorship; service concern)

Assets
o Current Assets - expected to be useful within one year from reporting date
 Cash - any medium of exchange that a bank will accept at face value. It includes
coins, currency, checks, money orders, bank deposits and drafts.
 Cash on hand – In the business premises
(vault, cash register, cash box)
 Cash in bank - deposited on the bank
 Trade and other Receivables – include the amounts collectible from any of the
following accounts:
 Accounts Receivable – amount collectible from customer to whom sales
have been made or services have been rendered on account or credit
 Notes Receivable – promissory note issued by the client or the customer in
exchange for services or goods received as evidence of his/her obligation to
pay
 Accrued Income – income already earned but not yet received
 Inventories - Cost of unfinished work at the end of the accounting period.
- For service concern, this account is known as work in process
inventory.
 Prepaid Expenses – expenses paid for the business in advance. It is an asset
because the business avoids having to pay cash in the future for a specific
expense.
 Contra-Asset Accounts – are accounts deducted from the related asset accounts
 Allowance for Bad Debts – losses due to uncollectible accounts
 Accumulated Depreciation – represents the expired cost of property,
plant, and equipment as a result of usage and passage of time

o Non-Current Assets - expected to be useful for more than one year

from reporting date
 Property, Plant, and Equipment – are tangible assets that are held by an
enterprise for use in the production or supply of goods and services, or for
administrative purposes.
 Land - parcel of lot owned and used by the business entity.
 Building – edifice or structure used to accommodate the office store, or
factory of a business enterprise in the conduct of its operations
 Equipment - this account records the acquisition and disposition of office
machines, cars, trucks, and similar items.
 Furniture and Fixtures - account that
Furniture - movable
records the acquisition and
disposition of office chairs, tables, Fixtures - attached to the
cabinets, and the like building, hence immovable
 Intangible Assets - these are relatively
long-lived assets without physical characteristics, which value lies in
 rights, privileges, and competitive advantages, which they give the owner.
(e.g. patents, copyrights, licenses, franchises, goodwill, trademarks)
 Contra-Asset Accounts
 Accumulated Depreciation - It is the total amount an asset has
been depreciated up until a single point.
 Accumulated Amortization - It is the total amount an intangible asset has
been amortized up until a single point.

Liabilities
o Current Liabilities - expected to be paid within one year from reporting
date
 Trade and Other Payables – include payables from any of the following accounts:
 Accounts Payable – oral promise to pay
- Includes debts arising from the purchase of an asset or
the acquisition of services on account
 Notes Payable – written promise to pay
- Includes debts arising from the purchase of an asset or the
acquisition of services on account evidenced by a
promissory note
 Utilities Payable – is an obligation to pay utility companies for services
received from them
 Unearned Revenues – this include the acceptance of payment in advance for a
service that is not yet rendered or goods not yet delivered.
 Accrued Liabilities - amount owed by the business for unpaid expenses.

o Non-Current Liabilities - expected to be paid beyond one year from

reporting date
 Mortgage Payable - this account records long-term debt of the business entity for
which the business entity has pledged certain assets as security for creditor.
 Bonds Payable – is a certificate of indebtedness under the seal of a corporation,
specifying the terms of repayment and the rate of interest to be charged

Owner’s Equity
 Capital - used to record the original and additional investments of the owner of the
business entity.
 Drawing – represents the withdrawals made by the owner of the business in cash or
other assets
 Income Summary – is a temporary account used at the end of the accounting period
to close income and expense accounts

Revenues
o Service Revenue - earned by performing services for a customer or client.
(Main operations)
o Other Revenues - earned not from the main operations.
 Expenses
o Operating Expenses
o Administrative Expenses - Costs incurred to administer the business
 Electricity, Fuel and Water Expenses (Utilities) – expenses related to use of
consumption of electricity, fuel and water.
 Rent Expense – expense for space, equipment or other asset rentals.
 Supplies Expense – expense of using supplies in the conduct of daily
business.
 Insurance Expense – portion of premiums paid on insurance coverage.
 Depreciation Expense – the portion of the cost of a tangible asset allocated
or charged as expense during an accounting period.
 Uncollectible Accounts Expense – the amount of receivables estimated to
be doubtful of collection and charged as expense during an accounting
period.
o Selling Expenses - Expenses incurred related to marketing or promotions for the
business to sell its product or services, or distribute its product.
 Advertising expenses – incurred for ads on TV, radio, and other media
 Delivery expenses – incurred for distribution and delivery
o Other Expenses - All other operating expenses which cannot be classified as
administrative or selling
 miscellaneous expenses
 losses from sale of equipment

o Finance Cost
o Interest Expense – An expense related to the use of borrowed funds.

 Chart of Accounts – is a list of all account titles used by the company with their corresponding
numbers
Anime World Gallery Remember:
Chart of Accounts Account Titles are
arranged in financial
Balance Sheet Accounts
Assets Liabilities
statement order.
110 Cash 210 Accounts Payable
120 Accounts Receivable 220 Notes Payable Balance Sheet accounts
130 Art Supplies 230 Salaries Payable which include assets,
140 Prepaid Rent 240 Utilities Payable
liabilities, and owner’s
150 Prepaid Insurance 250 Interest Payable
160 Office Equipment 260 Unearned Painting Revenue equity come first.
165 Accumulated Depreciation: Account titles in the
Office Equipment Owner’s Equity income statement which
170 Furniture and Fixture 310 Ong, Capital include revenue and
175 Accumulated Depreciation: 320 Ong, Drawing
Furniture and Fixture 330 Income Summary
expenses follow.

Income Statement Accounts The accounts are

Income Expenses numbered for purposes
410 Painting Revenue 510 Salaries Expense
of indexing and cross-
520 Art Supplies Expense
530 Rent Expense referencing.
540 Insurance Expense
550 Utilities Expense
560 Depreciation Expense:
Office Equipment
570 Depreciation Expense:
Furniture and Fixture
 The Accounting Cycle – a series of sequential steps or procedures performed to accomplish the
accounting process.
Identification of Events to be Recorded. To gather Information About Transactions or events
Step 1 generally through source documents

Transactions are Recorded in the Journal. To record the economic impact of transactions on
Step 2 the firm in a journal, which is a form that facilitates transfer to the accounts

Journal Entries are Posted to the Ledger. To transfer the information from the journal to the
Step 3 ledger for classification

Preparation of a Trial Balance. To provide a listing to verify the equality of debits and credits in
Step 4 the ledger

Preparation of the Worksheet including Adjusting Entries. To aid in the preparation of

Step 5 financial statements

Preparation of Financial Statements. To provide useful information to decision-makers

Step 6

Adjusting Journal Entries are Journalized and Posted. To record accruals, expiration of
Step 7 defferals, estimations and other events from the worksheet

Closing Journal Entries are Journalized and Posted. To close temporary accounts and transfer
Step 8 profit to owner's equity

Preparation of Post-Closing Trial Balance. To check the equality of debits and credits after the
Step 9 closing entries

Reversing Journal Entries are Journalized and Posted. To simplify the recording of certain
Step regular transactions in the next accounting period
10

During the At the end of the At the start of the

accounting period accounting period next period
  Journal
Journal – is a chronological record of entity’s transactions
- The book of original entry
o General Journal – is the simplest journal
Journalizing - The process of recording a transaction in the journal
Journal Entry – entry recorded in the journal

Journal page 1
Date Account Titles and Explanation P.R. Debit Credit
1 1 20204
3
2 May 1 Cash 2
250,000 5
3 Perez-Manalo, Capital 250,000
4 Initial Investment
5

Format:
1. Date. The year and month are not rewritten for every entry unless the year or month
changes or a new page is needed.
2. Account Titles and Explanation. The account to be
Generally, skip a line after
debited is entered at the extreme left of the first line
each entry.
while the account to be credited is entered slightly
indented on the next line. A brief description of the transaction is usually made on the
line below the credit.
3. 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.
4. Debit. The debit amount for each account is entered in this column
5. Credit. The credit amount for each account is entered in this column.
  The Ledger
Ledger – is the group of the accounts used by the company
- book of final entry
Posting – is the process of transferring information from the journal to the ledger

Journal

Journal page 1 2
Date Account Titles and Explanation P.R. Debit Credit
1 2020
2 May 1 Cash 110 250,000
3 Perez-Manalo, Capital 310 250,000 3
1 4 Initial Investment
5
4 3 4
Ledger

Cash Account No. 110

Date Explanation J.R. Debit Credit Balance
1 2020
2 May 1 Initial Investment J-1 250,000 250,000
3

Perez-Manalo, Capital Account No. 310

Date Explanation J.R. Debit Credit Balance
1 2020
2 May 1 Initial Investment J-1 250,000 250,000
3

Posting:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference (J.R) column of the ledger
3. Post the debit figure from the journal as the debit figure in the ledger and the credit figure from
the journal as a credit figure in the ledger.
4. Enter the account number in the posting reference column of the journal once the figure has been
posted to the ledger.
  Trial Balance
o Is a list of all accounts with their respective debit or credit balances
o Is prepared to verify the equality of debits and credits in the ledger at the end of each
accounting period or at any time the postings are updated
o Is a control device that helps minimize accounting errors.

Weddings “R” Us
Trial Balance
May 31, 2020
Procedures:
Cash P22,200 1. List the account
Accounts Receivable 12,000 titles in numerical
Supplies 18,000 order
Prepaid Rent 8,000 2. Obtain the account
Prepaid Insurance 14,400 balance of each
Service Vehicle 420,000 account from the
Office Equipment 60,000 ledger and enter
Notes Payable P210,000 the debit balances
Accounts Payable 53,000 in the debit column
Utilities Payable 1,400 and the credit
Unearned Referral Revenues 10,000 balances in the
Perez-Manalo, Capital 250,000 credit column
Perez-Manalo, Withdrawals 14,000 3. Add the debit and
Consulting Revenues 62,400 credit columns
Salaries Expense 13,800 4. Compare the totals
Utilities Expense 4,400

Totals P586,800 P586,800

 Errors Affecting Trial Balance

1. If the difference between the Debit and Credit column totals is 10, 100, or 1,000, an error
in addition may have occurred.
o In this case, re-add the trial balance column totals. If the error still exists, recompute
the account balances.

2. If the difference between the Debit and

Credit column totals can be evenly divisible
by 2, the error may be due to the entering of
a debit balance as a credit balance, or vice
versa.
For example, if the Debit column total is
$20,640 and the Credit column total is
$20,236, the difference of $404 ($20,640 -
$20,236) may be due to a credit account
balance of $202 that was entered as a debit
account balance.
 o In this case, review the trial balance for account balances of one-half the difference
that may have been entered in the wrong column.

3. If the difference between the Debit and
Credit column totals is evenly divisible by 9,
trace the account balances back to the
ledger to see if an account balance was
incorrectly copied from the ledger.
Transposition - occurs when the order of the
digits is copied incorrectly, such as writing
$542 as $452 or $524.
Slide - the entire number is copied
incorrectly one or more spaces to the right
or the left, such as writing $542.00 as $54.20
or $5,420.00.

4. If the difference between the Debit and Credit column totals is not evenly divisible by 2 or
9, review the ledger to see if an account balance in the amount of the error has been
omitted from the trial balance.

5. If an error is not discovered by the preceding steps, the accounting process must be
retraced, beginning with the last journal entry.