The Accounting Equation and

Book of Accounts
Intended Learning Outcomes
1. Recall the accounting cycle
2. Recall the accounting equations
3. Determine the normal balance of an account
4. Differentiate journal from the Ledger
5. Prepare journal entries to record business transactions
6. Determine balances of accounts using t-accounts
Ø Step 1 : Identifying and analyzing the events to be recorded
A
Ø Step 2 : Recording the transactions in the journal
c
Ø Step 3 : Posting Journal Entries to the Ledger
c
Ø Step 4 : Preparing the trial balance C
o
Ø Step 5 : Preparing the worksheet and adjusting entries T y
u
Ø Step 6 : Preparing the Financial Statements h c
n
Ø Step 7 : Journalizing and posting of adjusting journal entries e l
t
Ø Step 8 : Journalizing and posting of closing journal entries e
i
Ø Step 9 : Preparing the post-closing trial balance n
Ø Step 10 : Journalizing and posting of reversing journal entries g
Rules for Debit And Credit

DEBIT Credit Credit

Asset = Liabilities + Owner’s Equity

Credit DEBIT DEBIT

The Journal – is a chronological record of events or business transactions showing
the effects of each transactions in terms of debits and credits. Transactions are
initially recorded in the journal, it is called the book of original entry.

Account Titles And Explanation

Posting Reference
Date

Date Account Titles and Explanations P.R. Debit Credit

2020
May 2 Cash 300,000
Maestro, Capital 300,00
*Initial Investment

Debit Credit
 Anime World Gallery
Chart of Accounts
Balance Sheet Accounts
ASSETS LIABILITIES
110. Cash 210. Accounts Payable
120. Accounts Receivable 220. Notes Payable
Chart of Accounts- 130. Art Supplies 230. Salaries Payable
is a list of all 140. Prepaid Rent 240. Utilities Payable

account titles used 150. Prepaid Insurance

160. Office Equipment
250. Interest Payable
260. Unearned Painting Revenue
by the company with 165. Acc. Dep. O.E OWNER’S EQUITY
their corresponding 170. Furniture and Fixture 310. Yu Capital

account numbers. 175. Acc. Dep. F & F 320. Ong Drawing

330. Income Summary
Income Statement Account
INCOME 530. Rent Expense
410. Painting Revenue 540. Insurance Expense
EXPENSES 550. Utilities Expense
510. Salaries Expense 530. Depreciation Expense O.E
520. Arts Supplies Expense 540. Depreciation Expense F& F
Ledger- is the group of
accounts used by the CASH ACCOUNT NO. 110
company. It is the book of DATE! EXPLANATION J.R DEBIT CREDIT BALANCE

final entry 2020

May 2 Initial Investment J1 300,000 300,000
May 3 Borrowed money… J1 100,000 400,000
Cash 110 May 5 Purchase Equipment J2 180,000 220,000
5/2 300,000 5/5 180,000 May 5 … J1 12,000 208,000
5/3 100,000 5/5 12,000
May 6 … J1 18,000 190,000
5/15 50,000 5/6 18,000
May 7 … J3 10,800 179,200
5/20 80,000 5/7 10,800
May 12 … J1 3,000 176,200
5/23 90,00 5/12 3,000
MAY 15 … J4 50,000 226,200
5/18 18,000
May 18 … J1 18,000 208,200
5/25 4,000
May 20 … J5 80,000 288,200
5/29 540
May 23 … J1 90,000 378,200
620,000 246,340
May 25 … J7 4,000 324,200
Bal. 373,660
May 29 … J8 540 373,660
Using T-Accounts
Using T-Accounts
 Anime World Gallery
Trial Balance
May 31, 2020
Cash P 373,660

Trial Balance… Accounts Receivable

Art Supplies
70,000
7,200
The schedule of all balances Prepaid Rent 18,000
to prove the equality of the Prepaid Insurance 10,800
Office Equipment 180,000
debit and credit. It is a listing Furniture and Fixture 40,000
of all account titles with their Accounts Payable P 32,200

respective debit or credit Notes Payable 100,000

Utilities Payable 4,500
balances taken from the Unearned Painting Revenue 80,000
ledger. However it does not Yu, Capital 300,000

check or vouch the accuracy YU, Drawing 18.000

Painting Revenue 210,000
of the report. Salaries Expense 4,000
Utilities Expense 5,040
726,700 726,700
Adjusting Entries…
• Adjusting entries are journal entries that are made in
the accounting journals at the end of an accounting period after the
preparation of the trial balance.
• The main objective underlying the adjusting entries is that certain
revenues and expenses are required to be matched with the
accounting period in which they occurred.
• In the case of accrual basis accounting, it is necessary to adjust
journal entries since the transfer of cash does not always take place
at the time of purchasing an item, availing services or incurring an
expense. Consequently, the journal entries are adjusted at the end
of an accounting period.
• After the adjusting entries have been made in the accounting
journals, they are captured in the general ledger in the same way
as any other accounting journal entry.
PREPAYMENTS- are expenses already paid but not yet incurred
or used.
Journal entry upon payment
Date Account Titles and Explanations P.R. Debit Credit
2020
Prepaid Expenses xxx
Cash xxx
* bought prepaid expense

Adjusting journal entry at the end of accounting period

Date Account Titles and Explanations P.R. Debit Credit

2020
Expenses xxx
Prepaid Expenses xxx

* record the expired expense

Note: The amount of the adjusting journal entry represent the expired or used
portion of the prepayment
Illustrative Problem- PREPAYMENT
On April 30, 2020, Company X paid 36,000 worth of insurance premium for 2
years. Give the adjusting journal entry on June 30, 2020.
• Journal entry upon payment on April 30, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
April 30 Prepaid Insurance 36,000
Cash 36,000
* paid two years insurance

• Adjusting Journal Entry at the end of the accounting period June 30,
2020
Date Account Titles and Explanations P.R. Debit Credit
2020
June 30 Insurance Expense 3,000
Prepaid Insurance 3,000
* to record the expired insurance
Illustrative Problem- PREPAYMENT
On September 1, 2020 Company X paid a one-year advance rent for 30,000.
Give the adjusting journal entry on December 31, 2020.
• Journal entry upon payment on April 30, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
September 1 Prepaid Rent 30,000
Cash 30,000
* paid rent for one year

• Adjusting Journal Entry at the end of the accounting period December

31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
Dec 31 Rent Expense 10,000
Prepaid Rent 10,000
* to record expired rent
Illustrative Problem- PREPAYMENT
Supplies account showed a balance of 4,000. Supplies used during the year
amount to 2,300. Give the adjusting journal entries on December. 31, 2020.
• Adjusting Journal entry on December 31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Supplies Expense 2,300
Supplies 2,300
* to record supplies used for the year

Supplies account on January 1, 2020, showed a balance of 8,000. On

December 31, 2020, supplies on hand amounted to 3,500.
• Adjusting Journal entry on December 31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
Dec 31 Supplies Expense 4,500
Supplies 4,500
* to record supplies used for the year
Deferrals- is income already received but not yet
recorded.
- Journal entry upon receipt of cash
Date Account Titles and Explanations P.R. Debit Credit
2020
Cash xxx
Unearned Revenue/Income xxx
*received cash for services to be rendered

- Adjusting journal entry at the end of accounting period

Date Account Titles and Explanations P.R. Debit Credit

2020
Unearned Revenue xxx
Revenue/Income xxx

* record the expired expense

Note: The amount of the adjusting journal entry represent the earned portion
of the amount initially received.
Illustrative Problem- DEFFERALS
On August 1, Dr. Yu received 90,000 for dental fees to be rendered in the next
6 months. Give the adjusting entry at the end of September.
• Journal entry upon payment on August 1, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
August 1 Cash 90,000
Unearned Dental Fees 90,000
* receipt advance payment

• Adjusting Journal Entry at the end of the accounting period September

30, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
Sept. 30 Unearned Dental Fees 30,000
Dental Fees 30,000
* to record dental fees earned
Illustrative Problem- DEFFERALS
On December 1, 2020, Davis Co. received 48,000 amount of advanced rental
for 6 months. Give the adjusting entry at the end of December 31, 2020.
• Journal entry upon payment on December 1, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 1 Cash 48,000
Unearned Rent Income 48,000
* paireceipt advance payment

• Adjusting Journal Entry at the end of the accounting period December

31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Unearned Rent Income 8,000
Rent Income 8,000
* to record Rent income earned
Accrued Expenses – are expenses already incurred
or used, but not yet paid

- Adjusting Journal Entry at the end of accounting

period.

Date Account Titles and Explanations P.R. Debit Credit

2020
Expenses xxx
Expenses Payable xxx
* to record unpaid expenses
Illustrative Problem- Accrued Expenses
The company received a Maynilad bill in the amount of 9,800 on December
26, 2020. The company intends to pay it on January 8, 2021.
• Adjusting Journal entry at the end of accounting period
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Utilities Expense 9,800
Utilities Payable 9,800
* to record unpaid utilities

Unpaid salaries at the end of December 31, 2020 amounted to 18,800.

• Adjusting Journal Entry on December 31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Salaries Expense 18,800
Salaries Payable 18,800
* To record unpaid salaries
Accrued Income – are income already earned, but
not yet received.

- Adjusting Journal Entry at the end of accounting

period.Date Account Titles and Explanations P.R. Debit Credit
2020
Income Receivable xxx
Income xxx
* to record income earned
Illustrative Problem- Accrued Income
A one-year, 6% note receivable in the amount of 200,000 was received on
January 1, 2020. The interest and the principal are payable on maturity date.
Give the adjusting entry on June 30,2020.

• Adjusting Journal entry on June 30, 2020.

Date Account Titles and Explanations P.R. Debit Credit

2020
June 30, Interest Receivable 6,000
Interest Income 6,000
* to record interest income earned

Formula
Interest = Principal x Rate x Time
= 200,000 x 6% x ½ year
= 6,000
Bad Debts/ doubtful accounts – are losses due to uncollectible
accounts.
Date Account Titles and Explanations P.R. Debit Credit
2020
Bad Debt Expense xxx
Allowance for Bad Debts xxx
* to record estimated uncollectible accounts

Date Account Titles and Explanations P.R. Debit Credit

2020
Doubtful Account Expense xxx
Allowance for Doubtful Account xxx
* to record estimated uncollectible accounts

Date Account Titles and Explanations P.R. Debit Credit

2020
Uncollectible Accounts xxx
Allowance for Uncollectible Accounts xxx
* to record estimated uncollectible accounts
Illustrative Problem- Bad Debts…
Accounts Receivable shows a balance of 100,000. It is estimated that 8% of this is
uncollectible. Give the adjusting entry on Dec. 31, 2020 for the provision of the estimated
uncollectible accounts.
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Bad debt expense 8,000
Allowance for bad debts 8,000
* to record estimated uncollectible acc.

Accounts Receivable shows a balance of 100,000. It is estimated that 8% of this is

uncollectible. Allowance for Bad Debts per general ledger has a balance of 1,000. Give the
adjusting entry on Dec. 31, 2020 for the provision of the estimated uncollectible accounts
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Bad debt expense 7,000
Allowance for bad debts 7,000
* to record estimated uncollectible acc.
DEPRECIATION EXPENSE
is the allocation of plant asset cost over its estimated useful life.
This is the expense allotted for the wear and tear of property,
plant and equipment due to passage of time.

The following are the three factors considered in computing the

depreciation expense.

• Cost – is the purchase price/original price

• Salvage Value - is the estimated value of the assets at the end
of its useful life
• Estimated Useful Life – as the name connotes, is not an exact
measurement but merely an estimation of the number of years
an asset can be useful to the enity.
The formula for computing the annual depreciation is as follows:

Cost xxx
Less : Salvage value xxx
Depreciable Cost xxx
Divided by: Estimated Useful Life xxx
Annual Depreciation xxx
=======
Illustrative Problem- Depreciation Expense
A building with an estimated useful life of 30 years finished on June 1, 2020. The
cost of the building is 4.8 million pesos with an estimated savage value of
300,000.
• Adjusting Journal entry on Dec 31, 2020.
Date Account Titles and Explanations P.R. Debit Credit
2020
Dec. 31, Depreciation Expense 87,500
Accumulated Depreciation- 87,500
Building
* to record depreciation expense
Formula
Cost 4,800,000
Less; Savage Value 300,000
150,000/12 x 7 – 87,500
Depreciable Cost 4,500,000
Divided by: EUL 30 years
Annual Depreciation P 150,000
 Anime World Gallery Anime World Gallery
Trial Balance Adjusted Trial Balance
May 31, 2020 May 31, 2020
Cash P 373,660
Cash P 373,660
Accounts Receivable 70,000
Accounts Receivable 70,000 Allowance for Bad debts 1,500
Art Supplies 5,400
Art Supplies 7,200
Prepaid Rent 6,000
Prepaid Rent 18,000
Prepaid Insurance 8,100
Prepaid Insurance 10,800 Office Equipment 180,000
Accumulated Depreciation- Equipment 5,000
Office Equipment 180,000
Furniture and Fixture 40,000
Furniture and Fixture 40,000 Accumulated Depreciation- Furni and FIxt 1,000

Accounts Payable P 32,200 Accounts Payable P 32,200

Notes Payable 100,000
Notes Payable 100,000
Utilities Payable 4,500
Utilities Payable 4,500
Unearned Painting Revenue 80,000
Unearned Painting Revenue 80,000 Yu, Capital 300,000

Yu, Capital 300,000 YU, Drawing 18.000

Painting Revenue 210,000
YU, Drawing 18.000
Salaries Expense 4,000
Painting Revenue 210,000
Utilities Expense 5,040
Salaries Expense 4,000 Insurance Expense 2,700
Rent Expense 12,000
Utilities Expense 5,040 Arts Supplies Expense 1,800
Depreciation Expense 6,000
P P Bad Debt Expense 1,500
726,700 726,700 P 734,200 P 734,200
• Accumulation of information on the details of operations entails
maintaining separate revenue and expense accounts.
• At the end of the period, this information is reported in the income
statement. The revenue and expense accounts are then closed to the
owner’s equity.
• This process also shows the result of operation.
• The closing entries update the owners capital account at the end of the
period.
• They also eliminate the balances of the nominal accounts to ready them
for the next reporting period.
• To close the temporary account, an entry is made to make the balance
become ZERO.
• Closing transfers the balances of the temporary accounts to the capital
accounts. The Income Summary, considered to be a summary account, is
use to close the income and expense accounts.
1. CLOSE THE INCOME ACCOUNTS…
• Since the income accounts have normal credit balances, each
revenue account will have to be debited in the amount of its
balance to bring their balances to ZERO. The credit is made to the
Income Summary account.

May 31, 2020

Painting Revenue 210,000
Income Summary 210,000
* To close income accounts…
2. CLOSE THE EXPENSE ACCOUNTS…
• Since the EXPENSE accounts have normal DEBIT balances, each
expenses account will have to be CREDITED to close the accounts.
Thus a compound entry is needed considering the number of expenses
accounts. The total expenses of all expenses account is the debited to
Income Summary.

May 31, 200

Income Summary 33,040
Salaries Expense 4,000
Utilities Expense 5,040
Insurance Expense 2,700
Rent Expense 12,000
Art Supplies Expense 1,800
Depreciation Expense 6,000
Bad Debt Expense 1,500
* To close the expense accounts…
3. CLOSE THE INCOME SUMMARY TO CAPITAL
• Notice that after posting the entries involving the income and
expenses accounts, the balace of the income summary account is
exactly the net income or net loss of the company for the period. A
credit balance indicate a net income a debit balance indicate a
net loss. Regardless whether the business yields a net income or net
loss, the income summary account must be closed to the capital
account.

May 31, 200

Income Summary 176,960
Yu, Capital 176,960
* to close income summary to capital
4. CLOSE THE DRAWING ACCOUNT
- The drawing account represents the amount
withdrawn by the owner either in cash or non-cash assets
for personal used. It is for the reason that the debit
balances of the drawing accounts should be closed to
capital.

May 31, 200

Yu, Capital 18,000
Yu, Drawing 18,000
* to close drawing account to capital
• The post closing trial balance is prepared from the
general ledger accounts after the closing entries have
been posted. This is necessary to ensure that these entries
have correctly posted.
• This will also test the equality of the accounts.
• The post closing trial balance confirm the equality of the
debits and credits.
• It contains only balance sheet items such as assets,
liabilities, and ending capital because all the income and
expense accounts as well as the drawing account all
have zero balances as a result of closing entries.
 Anime World Gallery
Adjusted Trial Balance
May 31, 2020

Cash P 373,660
Accounts Receivable 70,000
Allowance for Bad debts 1,500 Yu, Capital
Art Supplies 5,400
5/31 18,000 5/2 300,000
Prepaid Rent 6,000
5/31 176,960
Prepaid Insurance 8,100
18,000 476,960
Office Equipment 180,000
Accumulated Depreciation- Equipment 5,000
Bal. 458,960
Furniture and Fixture 40,000
Accumulated Depreciation- Furni & FIxt 1,000
Accounts Payable P 32,200
Notes Payable 100,000
Utilities Payable 4,500
Unearned Painting Revenue 80,000
Yu, Capital 458,960
P 683,160 P 683,160