CHAPTER 4: RECORDING BUSINESS TRANSACTION - DOUBLE ENTRY SYSTEM

RECORDING PROCESS:

The Account Steps in the Recording The Recording Process The trial Balance
Process Illustrated

- Debits and - Journal - Summary illustration of - Limitations of a trial

Credits journalizing and posting balance
- Ledger
- Summary of - Location Errors
debit/credit rules
- Use of peso Signs

Account is the basic storage of information in accounting, e.g., “cash,” “accounts

receivable,”, “land,” etc. In other words, an account is an individual accounting record of
increases and decreases in a specific asset, liability, or owner’s equity item.
Accounts in the ledger follow the format of a T-account, wherein the left side is called the
debit side and the right side is called the credit side
DOUBLE-ENTRY SYSTEM:
The term debit is simply means the left side of an account while credit means the right side.
They are commonly abbreviated as Dr. for debit and Cr. for credit.
It is important to learn the normal balance of an account.
Type of Account Normal Balance

Asset Debit

Liability Credit

Equity Credit

Income Credit

Expense Debit

DEBITS & CREDITS

When comparing the totals of the two sides, an

account shows a debit balance if the total of the
debit amounts exceeds the credits. An account
shows a credit balance if the credit amounts
exceed the debits.
Note the position of the debit side and credit
side. The procedure of recording debits and
credits in an account is shown in Illustration for
the transactions affecting the Cash account of
Messbyte. The data are taken from the Cash
column of the tabular summary

STEPS IN RECORDING PROCESS:

1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.
Journalizing is the process of recording General Journal
transactions in the journal by means of journal
entries. Date Account titles and Ref Debit Credit
explanation
The Journal (also called the book of original
entry) is a formal record where transactions 2020 Cash P 15000

are initially recorded chronologically through Sept, 1

journal entries.
Owner’s Capital P 15000
Entering transaction data in the journal is
known as journalizing. Companies make (Owner’s investment of cash
in business)
separate journal entries for each transaction. A
complete entry consists of (1) the date of the 1 Equipment 7000

transaction, (2) the accounts and amounts to be Cash 7000

debited and credited, and (3) a brief
(Purchase of equipment for
explanation of the transaction cash)

1.The date of the transaction is entered in the Date column.

2 The debit account title (that is, the account to be debited) is entered first at the extreme left
margin of the column headed “Account Titles and Explanation,” and the amount of the debit is
recorded in the Debit column.
3 The credit account title (that is, the account to be credited) is indented and entered on the next
line in the column headed “Account Titles and Explanation,” and the amount of the credit is
recorded in the Credit column
4 A brief explanation of the transaction appears on the line below the credit account title. A space
is left between journal entries. The blank space separates individual journal entries and makes the
entire journal easier to read.
5 The column titled Ref. (which stands for Reference) is left blank when the journal entry is made.
This column is used later when the journal entries are transferred to the ledger accounts.
• It is important to use correct and specific account titles in journalizing.
SIMPLE & COMPOUND ENTRY
a. Simple Journal Entry - Contains a single debit and a single credit
b. Compound Journal Entry – contains two or more debits or credits
• On July 1, Bitter Company purchases a delivery truck costing 14,000. It pays 8,000 cash
now and agrees to pay the remaining 6,000 on account (to be paid later). The compound
entry is as follows:

General Journal

Date Account Titles and Explanation Ref. Debit Credit

2020 Equipment P 14,000

July 1

Cash P 8,000

Accounts Payable 6,000

(Purchased truck for cash with balance on

account)

POSTING is the process of transferring data from the journal to the appropriate accounts in the
ledger. The purpose of posting is to classify the effects of transactions on specific asset, liability,
equity, income and expense accounts in order to provide more meaningful information. Posting
involves the following steps.
1.In the ledger, in the appropriate columns of the account(s) debited, enter the date, journal page,
and debit amount shown in the journal.
 2. In the reference column of the journal, write the account number to which the debit amount was
posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the date, journal page,
and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which the credit amount was
posted.

• Posting should be performed in

chronological order. That is, the
company should post all the debits and
credits of one journal entry before
proceeding to the next journal entry.
Postings should be made on a timely
basis to ensure that the ledger is up to
date.
• The reference column of a ledger
account indicates the journal page from
which the transaction was posted.
• The explanation space of the ledger
account is used infrequently because an
explanation already appears in the
journal.

The Ledger also called the book of secondary entries

or book of final entries, is a systematic compilation of
a group of accounts. Companies may use various kinds
of ledgers, but every company has a general ledger. A
general ledger contains all the asset, liability, and
owner’s equity accounts.
Companies arrange the ledger in the sequence
in which they present the accounts in the
financial statements, beginning with the
balance sheet accounts. First in order are the
asset accounts, followed by liability accounts,
owner’s capital, owner’s drawings, revenues,
and expenses. Each account is numbered for
easier identification.

Most companies have a chart of accounts. This chart lists the accounts and the account numbers
that identify their location in the ledger. The numbering system that identifies the accounts usually
starts with the balance sheet accounts and follows with the income statement accounts.

An account number is assigned to

each account. It is used to facilitate
recording, arranging and cross
referencing of the accounts
 A trial balance is a list of general ledger accounts and their balances. It is prepared to check
the equality of total debits and total credits in the ledger. The preparation of the trial balance
creates a starting point for the preparation of the financial statements.
• The trial balance proves the mathematical equality of debits and credits after
posting. Under the double-entry system, this equality occurs when the sum of the
debit account balances equals the sum of the credit account balances. A trial
balance may also uncover errors in journalizing and posting. For example, a trial
balance may well have detected the error at Fidelity Investments discussed in the
Feature Story. In addition, a trial balance is useful in the preparation of financial
statements, as we will explain in the next two chapters.

ILLUSTRATED RECOR DING PROCESS:

1. On October 1, C. R. Byrd invests $10,000 cash in an advertising company called Pioneer Advertising Agency.
2. On October 1, Pioneer purchases office equipment costing $5,000 by signing a 3-month, 12%, $5,000 note payable.
3. On October 2, Pioneer receives a $1,200 cash advance from R. Knox, a client, for advertising services that are expected
to be completed by December 31.
4. On October 3, Pioneer pays office rent for October in cash, $900.
5. On October 4, Pioneer pays $600 for a one-year insurance policy that will expire next year on September 30
6. On October 5, Pioneer purchases an estimated 3-month supply of advertising materials on account from Aero Supply
for $2,500.
7. On October 9, Pioneer hires four employees to begin work on October 15. Each employee is to receive a weekly salary
of $500 for a 5-day work week, payable every 2 weeks—first payment made on October 26
8. On October 20, C. R. Byrd withdraws $500 cash for personal use
9. On October 26, Pioneer owes employee salaries of $4,000 and pays them in cash. (See October 9 transaction.).
10. On October 31, Pioneer receives $10,000 in cash from Copa Company for advertising services provided in October.

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