CO QAH + MELC LW

Course Outline & Quality Assured HANDOUT No. 5

Handouts paired with MELC- ENTREPRENEURSHIP
Based Learner’s Worksheet

MELC:
 Identifying the reasons for keeping business records
 Perform key bookkeeping tasks
CS_EP11/12B-ENTREP-Iva-i-2

Semester: Second Week No. 5 Day: 1- 4

LESSON: Keeping Business Record and Performing key bookkeeping Tasks

BIG IDEA:
 Business records serve as a powerful analytical tool to review the past performance of the business, to
understand the current performance of the business, and to project future business performance.

TOPIC 1: Identifying the reasons for keeping business records

Everyone in business must keep records. Keeping good records is very important to your business. Good records
will help you do the following:

1. Monitor the progress of your business. You need good records to monitor the progress of your business.
Records can show whether your business is improving, which items are selling, or what changes you need to
make. Good records can increase the likelihood of business success.

2. Prepare your financial statements. You need good records to prepare accurate financial statements. These
include income (profit and loss) statements and balance sheets. These statements can help you in dealing with
your bank or creditors and help you manage your business.
 An income statement shows the income and expenses of the business for a given period of time.
 A balance sheet shows the assets, liabilities, and your equity in the business on a given date.

3. Identify sources of your income. You will receive money or property from many sources. Your records can
identify the sources of your income. You need this information to separate business from non-business receipts
and taxable from non-taxable income.

4. Keep track of your deductible expenses. Unless you record them when they occur, you may forget expenses
when you prepare your tax return.

5. Keep track of your basis in property. Your basis is the amount of your investment in property for tax
purposes. You will use the basis to figure the gain or loss on the sale, exchange, or other disposition of property,
as well as deductions for depreciation, amortization, depletion, and casualty losses.

6. Prepare your tax return. You need good records to prepare your tax returns. These records must support the
income, expenses, and credits you report. Generally, these are the same records you use to monitor your business
and prepare your financial statement.

7. Support items reported on your tax returns. You must keep your business records available at all times for
inspection by Bureau of Internal Revenue. If the BIR examines any of your tax returns, you may be asked to
explain the items reported. A complete set of records will speed up the examination.

TOPIC 2: Perform Bookkeeping Tasks

What is Bookkeeping?
 It is the process of recording business transactions in a Book of Account, in a systematic and chronological
manner. In which will be consolidated later to help construct financial statement such as the Trial Balance,
Income Statement, and Balance Sheet.
 Systematic because it follows procedures and principles
 Chronological because the transactions are recorded in order of the date of occurrence,
It is the foundation for gathering the information necessary to answer questions related to profitability,
 solvency and liquidity of the business

In general in bookkeeping it records transaction, sends invoices, makes payments, manages accounts, and
prepares financial statements. Bookkeeping and accounting are similar, but bookkeeping lays the basis for the
accounting process—accounting focuses more on analysing the data that bookkeeping merely collects.

Procedures in performing bookkeeping

1. Understand business accounts. In the world of bookkeeping, an account does not refer to an individual bank
account. Instead, an account is a record of all financial transactions of a certain type, like sales or payroll.

There are five basic types of accounts:

a. Assets - which are the cash and resources owned by the business (e.g., accounts receivable, inventory)
b. Liabilities - which are the obligations and debts owed by the business (e.g., accounts payable, loans)
c. Revenues or income -which is the money earned by the business, usually through sales
d. Expenses or expenditures - which is the cash that flows out from the business to pay for some item or
service (e.g.,salaries, utilities
e. Equity- which is the value remaining after liabilities are subtracted from assets, representing the
owner’s held interest in the business (e.g., stock, retained earnings)

Bookkeeping begins with setting up each necessary account so you can record transactions in the appropriate
categories. You likely wont have the same exact accounts as the business next door, but many accounts are
common. The table below shows some frequently used small business accounts and their types.

ACCOUNT DESCRIPTION ACCOUNT TYPE

Accounts Payable Liability
Accounts Receivable Asset
Cash Asset
Dividends Equity
Equipment Asset
Insurance Expense Expense
Interest Expense Expense
Interest Income Revenue
Interest Payable Liability
Inventory Asset
Owner’s capital Equity
Real Estate Asset
Rent Expense Expense
Rental Income Revenue
Retained Earnings Equity
Salaries and Wages Expense
Sales Income Revenue
Supplies Asset
Supplies Expense Expense
Unearned Service Revenue Liability
Utilities Expense Expense
2. Set up your business accounts. Knowing the accounts, you need to track for your business is one thing;
setting them up is another. Back in the day, charts of accounts were recorded in a physical book called the
general ledger (GL). But now, most businesses use computer software to record accounts. It might be a virtual
record rather than a hard copy, but the overall file is still called the general ledger.

There are three main methods for creating a General Ledger:

1. Spreadsheet software (e.g., Excel) is the cheapest option; Google Sheets doesn’t cost a monthly
fee but trying to craft your own general ledger in a spreadsheet program can spiral quickly into
disaster
2. Desktop accounting bookkeeping software (e.g., QuickBooks Desktop) usually requires a
high up-front fee, but the software is then yours to keep.
3. Cloud-based bookkeeping software (e.g., QuickBooks Online, Wave) you have to pay a monthly
fee to keep your online subscription, but it is a much lower cost than that of desktop software

3. Decide on a bookkeeping method. If you plan to do your own books in house instead of outsourcing to an
accounting or bookkeeping firm, you need to make one crucial choice before you start setting everything up:
Are you going to use single-entry bookkeeping or double-entry bookkeeping?

4. Record every financial transaction. You have created your set of financial accounts and picked a
bookkeeping system—now it is time to record what is actually happening with your money. It is crucial that
each debit and credit transaction is recorded correctly and in the right account. Otherwise, your account
balances wont match, and you will not be able to close your books.

Account Type Debit recorded for Credit recorded for

Asset Increase Decrease
Liability Decrease Increase
Revenue Decrease Increase
Expense Increase Decrease
Equity Decrease Increase

Note: To record a transaction, first determine the accounts that will be debited and credited.

Example:
Imagine that you have just purchased a new delivery truck for your gravel and sand business. You paid for
the truck, which cost P250,000, in cash. The transaction will affect two accounts: cash (an asset account) and
equipment (also an asset). Because you are decreasing your cash and increasing your equipment, you would
record a P250,000 debit (on the left) for the equipment account and a P250,000 credit for the cash account (on
the right). Note that journal entries do not include specific details about the item, vendor, or biller; you just
track debits and credits by account.

5. Balance the books. The last step in basic bookkeeping is to balance and close the books. When you tally up
account debits and credits—often at the end of the quarter or year—the totals should match. This means that
your books are “balanced.” You have been recording journal entries to accounts as debits and credits. At the
end of the period, you will “post” these entries to the accounts themselves in the general ledger and adjust the
account balances accordingly.

6. Prepare financial reports. Now that you have balanced your books, you need to take a closer look at what
those books mean. Summarizing the flow of money in each account creates a picture of your company’s
financial health. You can then use that picture to make decisions about your business’s future.

7. Stick to a schedule. At least once a week, record all financial transactions, including incoming invoices, bill
payments, sales, and purchases. And make it a priority to close your books regularly too. You may do this
every month, but at the very least, balance and close your books every quarter. Another pro tip? Make sure to
tackle your books when your mind is fresh and engaged—say, at the start of the day before you open your
doors rather than late at night, after you have closed up shop. You want to be at your best when you are
 looking at figures that explain your business’s profitability and help you chart a course for progress. Plus,
doing the books earlier in the day can help you minimize the temptation to put off bookkeeping until the next
day and then the day after that.

8. Store records securely. Proper record-keeping for small businesses makes the process easier and keeps you
compliant with the law. You never want to waste time chasing down last month’s missing invoice, and you
certainly do not want to find yourself in trouble with legal requirements.

The Rules of Debit and Credit

 In the process of journalizing, following the rules of Debit and Credit are essential part to ensure accurate
recording and sound decision making. Debit is abbreviated as DR while CR for Credit.
 It is a requirement that the bookkeeper is able to master the normal balance of each account title before
performing the tasks of bookkeeper.

When to Debit?
When cash or non-cash items are received, the said cash or non-cash items must be recorded in the
debit column. This means that the debit balance increased. It is called Value Received.

When to Credit?
When cash or non-cash items are given, the said cash or non-cash items must be recorded in the credit
column. This means that the credit balance is increased. It is called Value Parted With.

The following steps will be undertaken in determining account balances for every account title such as
cash, account receivable, etc.:

1. Add all the debit side to generate total debit

2. Add all the credit side to generate total credit.
3. Subtract total debit to the total credit.
4. Determine the balance of each account.

Depicted in figure 1 below is a matrix of normal debit and credit balances of Five Major Accounts:

Account Type Debit Credit

Assets √
Liabilities √
Owner’s Equity √
Revenue √
Expenses √

Book of Accounts - are composed of the Journal and Ledger.

General Journal - refers to the book of original entry. It is the most basic journal which provides columns for
date, account titles and explanations, folio or references and a separate column for debit and credit entries.
Depicted in figure 2 below is a sample format of a general journal

  NAME OF THE COMPANY  

  MONTH and YEAR ________________
   
  GENERAL JOURNAL  
  PAGE 1
          BALANCES
  DATE PARTICULARS FOLIO DEBIT CREDIT
  Month Day        
             
              
Figure 2-General Journal

General Ledger – refers to the book of final entry. It is a grouping of all accounts directly traceable to chart
of accounts. These accounts will be reflected in the financial statements as a summary of all financial activities
that have taken place as recorded in the general journal and subsidiary ledgers. Depicted in figure 3 below is a
sample format of a general ledger.

GENERAL LEDGER

  Account:     Account no.

  Date Item Ref. DEBIT CREDIT BALANCE
             
             
Figure 3 - General Ledger

To appreciate actual record keeping and bookkeeping, let us assume a Joan Batutay Ice Candy House business.
Let us assume that the business officially started on 1 January, 2020. The business needs to record its
transactions for one year and prepare the basic financial statements for the year ending 31 December 2020. We
will prepare the accounting entries.

1. January 2020. Mr. Ron Lopez and Mrs. Allaine started Roainne’s Batutay Business and invested P200,000.
They borrowed this capital from a bank, payable in three years with an 8% interest per annum.

  GENERAL JOURNAL  
  PAGE 1
        POST BALANCES
  DATE PARTICULARS REF. DEBIT CREDIT
 200,00
January 2020  Cash   0  
      Roainne’s, capital      200,000
    To record the initial Capital Investment      
      of Roainne’s