LESSON 5 - BASIC FINANCIAL ACCOUNTING &

REPORTING

Lesson 5 - 1 Recording Business Transactions

Lesson Objectives:
✓ List and explain in brief the sequential steps in the accounting cycle.
✓ Identify the general journal as the book of original entry.
✓ Detail standard contents of general journal.

TRANSACTION ANALYSIS (STEP 1)

The analysis of transactions should follow these four basic steps:
1. Identify the transaction from source documents.
2. Indicate the accounts - either assets, liabilities, equity, income or
expenses- affected by the transaction.
3. Ascertain whether each account is increased or decreased by the
transaction.
4. Using the rules of debit and credit, determine whether debit or credit the
account to record its increase or decrease.

Source document - Transactions and events are the starting points in the
accounting cycle. By relying on source documents, transactions and events
can be analyzed as to how they will affects performance and financial
position. Source documents identify and describe transactions and events
entering the accounting process.
The Journal - a chronological record of the entity’s transactions. A journal
entry shows all the effects of a business transaction in terms of debt and
credits. Each transaction is initially recorded in a journal rather than directly
in the ledger. A journal is called the book of original entry. The nature and
volume of transactions of the business determine the number and type of
journals needed. The general journal is the simplest journal.

Format
The standards contents of the general journal are as follows:
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 debited is entered at
the extreme left of the first line 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. Generally, skip a line after each
entry.
3. P. R. (posting reference). This will be used 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.
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.

Assume the Park Bo Geum established his own management agency with an
initial investment of P250,000 on November 1.

The journal entry is shown below:

TRANSACTIONS ARE JOURNALIZED (STEP 2)

After the transaction or event has been identified and measured, it is
recorded in the journal. The process of recording a transaction is called
journalizing.

Chart of Account - a listing of all the accounts and their account numbers in
the ledger. The chart is arranged in the financial statement order, that is,
assets first, followed by liabilities, owner’s equity, income, and expense.

POSTING (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 journal reference (J.R.)
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 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.

Ledger accounts after posting

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

TRIAL BALANCE (STEP 4)

The trial balance is a list of all accounts with their respective debit or credit
balances. It 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.
The procedures in the preparations of a trial balance follow:
1. List the account titles in numerical order.
2. Obtain the account balance of each account from the ledger and enter the
debit balances in the debit column and the credit balances in the credit
column.
3. Add the debit and credit columns.
4. Compare the totals.

Locating Errors
An inequality in the totals of the debits and credits would automatically
signal the presence of an error. These errors include:
1. 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.
2. Error in determining the account balances:
✓ A balance was incorrectly computed.
✓ A balance was entered in the wrong balance column.
3. 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 on the trial
balance.
✓ A debit balance was recorded on the trial balance as a credit or vice versa,
or a balance was omitted entirely.
 Test Your Knowledge

Problem 1 - Debits and Credits

Analyze each transaction and show the accounts affected by entering the
corresponding numbers in the appropriate debit or credit column. Indicate
no entry, if appropriate.

The following accounts are used by Kim Ji Won Maintenance Services:

1. Cash 7. Accounts Payable
2. Accounts Receivable 8. Won, Capital
3. Supplies 9. Won, Withdrawals
4. Prepaid Insurance 10. Service Revenue
5. Equipment 11. Rent Expense
6. Notes Payable 12. Repairs Expense

Kim Ji Won Maintenance Services completed

a) Paid for supplies purchased on account last month.
b) Billed customers for services performed.
c) Paid the current month’s rent.
d) Purchased supplies on credit.
e) Received cash from customers for services performed.
f) Acquired equipment on account.
g) Received a bill for repairs.
h) Returned part of the equipment purchased in (f) for the credit.
i) Received cash from customers previously billed.
j) Paid the bill received in (g).
k) Booked an appointment for services.
l) Paid for repairs with cash.
m) Made cash withdrawals.