INFORMATION SHEET NO. 1.

3-1

Journal Preparation

Learning Objective:

After reading this INFORMATION SHEET, the trainee will be able to:

1. Prepare journal entry in accordance with industry practice and

generally accepted accounting principles/Philippine Financial
Reporting Standards for transactions and events
2. Understand journal entry in accordance with the nature of
transactions.

Accounting

Practice and body of knowledge concerned primarily with

1. methods for recording transactions,
2. keeping financial records,
3. performing internal audits,
4. reporting and analyzing financial information to the management, and
5. advising on taxation matters.
It is a systematic process of identifying, recording, measuring, classifying,
verifying, summarizing, interpreting and communicating
financial information. It reveals profit or loss for a given period, and
the value and nature of a firm's assets, liabilities and owners' equity.
Accounting provides information on the
1. resources available to a firm,
2. the means employed to finance those resources, and
3. The results achieved through their use.

Types of major accounts

The five major accounts namely;

A. Assets –can be defined as objects or entities, whether tangible or

intangible, that the company owns that have economic value.
 Tangible assets are physical entities that the business owns such as
land, buildings, vehicles, equipment, and inventory.
 Intangible assets are things that represent money or value; things
such as Accounts Receivables, patents, contracts, and certificates of
deposit (CDs).
 Assets are also grouped according to either their life span or liquidity -
the speed at which they can be converted into cash.

Date Developed: Document No. B-NCllI-001

March 2018
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  Current assets are items that are completely consumed, sold, or
converted into cash in 12 months or less.
 Fixed assets are tangible assets with a life span of at least one year
and usually longer. Fixed assets might include machinery, buildings,
and vehicles. Fixed assets are typically not very liquid. And because of
their higher costs, assets are not expensed, but depreciated, or
"written off" over a number of years according to one of
several depreciation schedules.
B. Liabilities –are the debts, or financial obligations of a business - the
money the business owes to others. Liabilities are classified as current or
long-term.
1. Accounts payables
2. Loans payables
3. Notes payables
4. Income tax payables
5. Accrued Expenses
6. Other Liabilities

 Current liabilities are debts that are paid in 12 months or less, and
consist mainly of monthly operating debts. Current liabilities are
usually paid with current assets; i.e. the money in the company's
checking account. A company's working capital is the difference
between its current assets and current liabilities. Managing short-
term debt and having adequate working capital is vital to a company's
long-term success.
 Long-term liabilities are typically mortgages or loans used to
purchase or maintain fixed assets, and are paid off in years instead of
months.
C. Equities –is of utmost importance to the business owner because it is
the owner's financial share of the company - or that portion of the total
assets of the company that the owner fully owns. Equity may be in assets
such as buildings and equipment, or cash. Equity is also referred to as Net
Worth.
For example, if you purchase a P500,000vehicles with a P350,000 loan and
P150,000 in cash, you have acquired an asset of P500,000, but have only
P150,000 of equity.

1. Capital
2. Drawing
3. Retained Earnings

There are three types of Equity accounts that will meet the needs of smallest
businesses. These accounts have different names depending on the
company structure, so we list the different account names in the chart
below.
Date Developed: Document No. B-NCllI-001
March 2018
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  Contribution (Money Invested): There are times when company
owners must invest their own money into the company. It may be
start-up capital or a later infusion of cash. When this occurs,
a Capital or Investment account is credited. See the first row in the
table below.
 Distribution or Draw (Money Withdrawn): If a business is profitable,
the owners often want some of the profit returned to them. To track
this activity, a Draw or Distribution account is debited. This is the only
Equity account (non-contra) that receives debits. See the second row
in the table below.
 Accumulation from Prior Years: To tracks a company's Net Income
as it accumulates over the years, Retained Earnings or Owner's
Equity is credited. On the first day of the fiscal year, most accounting
programs automatically credit this account with the previous year's
Net Income. See the third row of the table below.

NOTE: Most single-owner companies enter journal entries to "close out" the
Contribution and Draw accounts to Retained Earnings on the last day of the
fiscal year. Partnerships, however, may choose not to close out these
accounts so that a permanent record of partner activity is maintained.

Subchapter
Sole Proprietor Partnership
Corporation
Owner's
Partner A Capital Paid in Capital
Investment - or
Contribution, - or -
Money invested -
Partner B Capital Capital
Capital
Contribution, etc. Contribution
Contribution
Partner A Draw,
Money withdrawn Owner's Draw Partner B Draw, Distribution
etc.
Cumulative Owner's Equity Partner A Equity,
Retained
Earnings (less - or - Partner B Equity,
Earnings
withdrawn) Owner's Capital etc.

D. Income-is money the business earns from selling a product or service, or

from interest and dividends on marketable securities. Other names for
income are revenue, gross income, turnover, and the "top line."
Date Developed: Document No. B-NCllI-001
March 2018
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  Net income is revenue less expenses. Other names for net income are
profit, net profit, and the "bottom line."
 Income is "realized" differently depending on the accounting method
used. Accrual basis accounting counts the revenue as soon as an
invoice is entered into the accounting system. Cash basis
accounting does not count the revenue until the invoice is paid.
 Income accounts are temporary or nominal accounts because their
balance is reset to zero at the beginner of each new accounting period,
usually a fiscal year. Most accounting programs perform this task
automatically.

1. Sales
2. Interest Income
3. Dividend income
4. Rent income
5. Service Income
6. Other Income
E. Expense –are expenditures, often monthly, that allow a company to
operate.
1. Salaries/wages
2. Rent expense
3. Utilities expense
4. Depreciation
5. Supplies
6. Repairs and Maintenance
7. Transportation

 Like revenue accounts, expense accounts are temporary accounts that

collect data for one accounting period and are reset to zero at the
beginning of the next accounting period. Most accounting programs
perform this task automatically.

 A unique type of Expense account, Depreciation Expense, is used

when purchasing Fixed Assets. Costly items, such as vehicles,
equipment, and computer systems, are not expensed, but
are depreciated or written off over the life expectancy of the item. A
contra-account, Accumulated Depreciation, is used to offset the Asset
account for the item. Please see your Accountant for help with the
depreciation of Assets.

Date Developed: Document No. B-NCllI-001

March 2018
BOOKKEEPING NC III Issued by:
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The accounting cycle is the name given to the collective process of
recording and processing the accounting events of a company. The series of
steps begin when a transaction occurs and end with its inclusion in the
financial statements

Date Developed: Document No. B-NCllI-001

March 2018
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What is a Journal Entry?

Journal entries are the first step in the accounting cycle and are used
to record all business transactions and events in the accounting system. As
business events occur throughout the accounting period, journal entries are
recorded in the general journal to show how the event changed in the
accounting equation.
For example, when the company spends cash to purchase a new vehicle,
the cash account is decreased or credited and the vehicle account is
increased or debited.

How to Make a Journal Entry?

Here are the steps to making an accounting journal entry.

1. Identify Transactions
There are generally three steps to making a journal entry. First, the
business transaction has to be identified. Obviously, if you don’t know a
transaction occurred, you can’t record one. Using our vehicle example
above, you must identify what transaction took place. In this case, the
company purchased a vehicle. This means a new asset must be added to the
accounting equation.
2. Analyze Transactions
After an event is identified to have an economic impact on the accounting
equation, the business event must be analyzed to see how the transaction
changed the accounting equation. When the company purchased the
vehicle, it spent cash and received a vehicle. Both of these accounts are
asset accounts, so the overall accounting equation didn’t change. Total
assets increased and decreased by the same amount, but an economic
transaction still took place because the cash was essentially transferred into
a vehicle.
Date Developed: Document No. B-NCllI-001
March 2018
BOOKKEEPING NC III Issued by:
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3. Journalizing Transactions
After the business event is identified and analyzed, it can be recorded.
Journal entries use debits and credits to record the changes of the
accounting equation in the general journal. Traditional journal entry format
dictates that debited accounts are listed before credited accounts. Each
journal entry is also accompanied by the transaction date, title, and
description of the event. Here is an example of how the vehicle purchase
would be recorded.
Since there are so many different types of business transactions,
accountants usually categorize them and record them in separate journal to
help keep track of business events. For instance, cash was used to purchase
this vehicle, so this transaction would most likely be recorded in the cash
disbursements journal. There are numerous other journals like the sales
journal, purchases journal, and accounts receivable journal.

Date Developed: Document No. B-NCllI-001

March 2018
BOOKKEEPING NC III Issued by:
JOURNALIZE Developed by:
TRANSACTIONS GorphineB.Leopoldo Page 20 of 95
Revision #
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