Journalizing Up To Trial Balance Readings

ACT1101 FAR EASTERN UNIVERSITY PROF.
BERNADETTE RAMOS
The Accounting Information System
Input Process Output
Inputs
All business transactions that are taken up in accounting records of the enterprise should have a supporting documents.
These source documents (e.g. invoice, official receipts, promissory notes, stock cetificates) are collected, classified and
filed in a chronological order or sequential order.
Process
The accounting for business transactions can only be accomplished in an efficient manner through a process called the
accounting cycle.
Steps in the accounting cycle

1. Analysis of business transactions through source documents.
2. Journalizing or recording of transactions in a journal or book of original entry.
3. Posting or transferring of the journal entries from the journal to the ledger.
4. Preparing the unadjusted trial balance.
5. Preparing a worksheet. (optional)
6. Recording adjusting journal entries to the journal and posting the same to the ledger.
7. Preparing the financial statements based on the adjusted trial balance.
8. Recording and posting of closing journal entries.
9. Preparation of a post-closing trial balance.
10. Preparing reversing entries and posting the same to ledger. (optional)
Output
The end product of the accounting process – the financial statements. Under Philippine Accounting Standards 1, the
complete set of Financial Statements include
1. The Statement of Comprehensive Income or a combination of Profit or Loss Statement and Statement of
Comprehensive Income.
2. Statement of Changes in Equity
3. Statement of Financial Position
4. Statement of Cash Flows.
5. Notes to Financial Statements
ACT1101 FAR EASTERN UNIVERSITY PROF. BERNADETTE RAMOS
This chapter will discuss steps 2-4, recording business transactions.
The Account, the Ledger, and the Journal

The basic summary device of accounting is the account. An account is the detailed record of all the changes that have
occurred in a particular asset, liability, or owner’s equity during a period. As we saw in Chapter 1, business transactions
cause the changes. Accountants record transactions first in a journal, which is the chronological record of transactions.
Accountants then copy (post) the data to the book (or printout) of accounts called the ledger. A list of all the ledger
accounts and their balances is called a trial balance.
Chart of Accounts
Organizations use a chart of accounts to list all their accounts along with the account numbers. Account numbers usually
have two or more digits. Assets are often numbered beginning with 1, liabilities with 2, owner’s equity with 3, revenues
with 4, and expenses.
Sample Chart of Accounts for a Small Company
This is a partial listing of another sample chart of accounts. Note that each account is assigned a three-digit number
followed by the account name. The first digit of the number signifies if it is an asset, liability, etc. For example, if the first
digit is a "1" it is an asset, if the first digit is a "3" it is a revenue account, etc. The company decided to include a column
to indicate whether a debit or credit will increase the amount in the account. This sample chart of accounts also includes
a column containing a description of each account in order to assist in the selection of the most appropriate account.
Asset Accounts
Liability Accounts
Owner's Equity Accounts
Operating Revenue Accounts

Operating Expense Accounts
Non-Operating Revenues and Expenses, Gains, and Losses

Accounting software frequently includes sample charts of accounts for various types of businesses. It is expected
that a company will expand and/or modify these sample charts of accounts so that the specific needs of the company
are met. Once a business is up and running and transactions are routinely being recorded, the company may add more
accounts or delete accounts that are never used.
Double-Entry Accounting
As we saw in Chapter 1, accounting is based on transaction data, not on mere whim or opinion. Each business
transaction has dual effects:
• The value received side (dr)
• The value parted with (cr)
For example, in the P1,000,000 cash receipt by Company, the business:
Received cash of P1,000,000 Issued P1,000,000 of Certificate of investment .
Accounting uses the double-entry system, which means that we record the dual effects of each transaction. As a
result, every transaction affects at least two accounts. It would be incomplete to record only the debit (dr), or the credit
(cr)
The chart of accounts lists the accounts that are available for recording transactions. In keeping with the double-entry
system of accounting, a minimum of two accounts is needed for every transaction—at least one account is debited and
at least one account is credited.
The T-Account
The most widely used form of account is called the T-account because it takes the form of the capital letter T. The
vertical line divides the account into its left and right sides, with the title at the top.
Account title
Left side – Right side –
Debit (dr) credit (cr)
The left side of the account is called the Debit side, and the right side is called the Credit side.
The account category (asset, liability, equity) governs how we record increases and decreases. For any given
account, increases are recorded on one side, and decreases are recorded on the opposite side. The following T-accounts
provide a summary.
Dr. Cr.
(Cr.) (Dr)
Assets Liabilities + Capital - Drawing + Income - Expenses
If we'll rearrange accounts,
Cr.
Dr. Normal Normal
(Dr)
(Cr.) Abnormal Abnormal
Assets + Drawing + Expenses Liabilities + Capital + Income
By transposing to the dr side, we can now tell the normal balance,. An account’s normal balance appears on
the side—debit or credit—where we record an increase. We take the abnormal balance to decrease For
example, asset has a normal balance of debit, debit to increase, credit to decrease. We can now express the
rules of debit and credit in final form:
Normal To To
balance increase decrease
Assets Dr Dr Cr
Liabilities Cr Cr Dr
Capital Cr Cr Dr
Drawing Dr Dr Cr
Income Cr Cr Dr
Expenses Dr Dr Cr
Recording journal entries

In practice, accountants record transactions in a journal. The journalizing process has three steps:
1 Identify each account affected and its type (asset, liability, or owner’s equity – capital, drawing, income ,
expenses).
2 Determine whether each account is increased or decreased. Use the rules of debit and credit.
3 Record the transaction in the journal, including a brief explanation. The debit side of the entry is entered first.
Total debits should always equal total credits. This step is“journalizing the transaction.”
Please take note that a journal entry includes four (4) parts
1. Date of the transaction

2. Title of the account debited, along with the dollar amount
3. Title of the account credited, along with the dollar amount
4. Brief explanation of the transaction
To show how to use the debit and credit analysis, we’ll use transactions in chapter 1.
Transaction 1: Initial investment made by the owner is P1,000,000.
Assets Dr.(Cr.) Liabilities Owner’s Equity

Cr. (Dr.) Cr. (Dr.)
Cash AR Supplies Land ‘= AP ‘+ Capital ‘- Drawing '+ Income - Expenses
1,000,000 1,000,000
The journal entry will be
Posting
Date Account Titles Reference Dr Cr
1 Cash 1000000
Owner's Capital 1000000
An increase in cash (asset) is debit and increase in capital is credit.
Transaction 2. Purchase of land

Company purchases land for an office location, paying cash of P400,000
Assets Liabilities Owner’s Equity
(400,000) 400,000
Posting
1 Land 400000
Cash 400000
An increase in Land (Asset) is debit and decrease in Cash (Asset) is credit.
Transaction 3: Purchase of Office Supplies on account


500 500
Posting
1 Supplies 500
Accounts Payable 500
An increase in Supplies (Asset) is debit and increase in Accounts Payable (Liability) is credit.
Transaction 4: Rendered services for cash P15,000

15,0000 15,0000
Posting
1 Cash 15,000
Service Revenue 15,000
An increase in Cash (Asset) is debit and increase in Service Revenue (Income) is credit.
Transaction 5: Rendered services on account P30,000

30,0000 30,000
Posting
1 Cash 15,000
Service Revenue 15,000
An increase in Accounts Receivable (Asset) is debit and increase in Service Revenue (Income) is credit.
Transaction 6: Payment of Expenses. The company pays 23,000 in cash expenses: rent of mobile office, P10,000;
employee salary, P12,000; and utilities, P1,000.

(23,000) (10,000) Rent
expense
(12,000) Salaries
Expense
(1,000) Utilities
Expense
.The journal entry will be
Posting
1 Rent Expense 10,000
Salaries Expense 12,000
Utilities Expense 1,000
Cash 23,000
A decrease in Cash (Asset) is credit and increase in Rent Expenses, Salaries Expenses, Utilities Expenses (Expenses) is
debit
Transaction 7: Payment on Account

Company pays P500 to the store from which it purchased supplies in transaction3.
(500) (500)
Posting
1 Accounts Payable 500
Cash 500
A decrease in Cash (Asset) is credit and decrease in Accounts Payable (Liability) is debit.
Transaction 8: Personal Transaction

The owner bought furniture for her home at a cost of P40,000, paying cash from personal funds. This event is not a
transaction of the company, it is a personal transaction of the owner. It has no effect on the business and, therefore,
journal entry is not needed..
Transaction 9: Collection of Accounts Receivable P30,000

30,000 (30,000)
Posting
1 Cash 30,000
Accounts Receivable 30,000
An increase in Cash (Asset) is debit and decrease in Accounts Receivable(Asset) is credit.
Transaction 10: Owners withdrawal of P100,000

Unlike in transaction 8, the owner withdrew P100,000 from the business and pays her personal debts.
(100,000) (100,000)
Posting
1 Owner, Drawing 100,000
Cash 100,000
A decrease in Cash (Asset) is credit and increase in Owner, Drawing (Owner’s Equity) is debit.
Posting (Copying Information) from the Journal to the Ledger

Journalizing a transaction records the data only in the journal—but not in the ledger. The data must also show up in the
ledger and, therefore, must be copied to the ledger. The process of copying from the journal to the ledger is called
posting. We post from the journal to the ledger. Debits in the journal are posted as debits in the ledger and credits as
credits.
A debit account may occasionally have a credit balance. That indicates a negative amount of the item. For example, Cash
will have a credit balance if the business overdraws its bank account. Also, the liability Accounts Payable—a credit
balance account—will have a debit balance if the entity overpays its account. In other cases, an odd balance indicates an
error. For example, a credit balance in Office Supplies, Furniture, or Buildings is an error because negative amounts of
these assets make no sense.
Flow of accounting data from journal to ledger
From General Journal

Posting
1 Cash 1000000
Owner's Capital 1000000
To the General ledger (partial)
Cash
Date PR Dr Date PR Dr
1-Jan 1,000,000
Owner Capital
Date PR Dr Date PR Dr
1-Jan 1,000,000
Source Documents
Accounting data come from source documents. The business received P1,000,000 and issued certificate of
investment to owner. The bank deposit slip is the document that shows the amount of cash received by the business,
and the certificate of investment issued by it, shows the amount of investment of the owner. Based on these
documents, the company can see how to record this transaction in the journal.
When business buys supplies on account, the seller sends an invoice requesting payment. The invoice is the
source document that tells the business how much to pay the vendor. The invoice shows what the business purchased
and how much it cost—telling it how to record the transaction.
Company may pay the account payable with a bank check, another source document. The check and the purchase
invoice give business
the information it needs to record the cash payment accurately. When business provides travel service for a client, the
company faxes a sales invoice to the client. Sales invoice is the source document that tells the company how much
revenue to record. There are many other different types of source documents in business.
The ledger accounts of the business after posting,

Cash
Date PR Dr Date PR Cr
1-Jan 1,000,000 2-Jan 400,000
4-Jan 15,000 6-Jan 23,000
9-Jan 30,000 7-Jan 500

10-Jan 100,000
Subtotals 1,045,000 523,500
Jan.31Balance 521,500
Accounts Receivable
5-Jan 30,000 9-Jan 30,000
Jan.31Balance -
Supplies
3-Jan 500
Jan.31Balance 500
Land
1-Jan 400,000
Accounts Payable
7-Jan 500 3-Jan 500
Jan.31Balance -
Owner Capital
1-Jan 1,000,000
Jan.31Balance 1,000,000
Owner Drawing
10-Jan 100,000
Service Revenues
4-Jan 15,000
5-Jan 30,000
Rent Expense
6-Jan 10,000
Salaries Expense
6-Jan 12,000
Utilities Expense
6-Jan 1,000
Jan.31Balance 1,000
Trial Balance
A trial balance summarizes the ledger by listing all the accounts with their balances— balance assets first, followed by
liabilities and then owner’s equity. In a manual accounting system, the trial balance provides an accuracy check by
showing whether total debits equal total credits. In all types of systems, the trial balance is a useful summary of the
accounts and their balances. The trial balance of the business is shown as follows:
The Company
Trial Balance
For th month ended January 31, 2014
Dr. Cr.
Cash 521,500
Accounts Receivable -
Supplies 500
Land 400,000
Accounts Payable -
Owner's Capital 1,000,000
Owner, Drawing 100,000
Service Revenues 45,000

Salaries Expense 12,000
Rent Expense 10,000
Utilities Expense 1,000
Totals 1,045,000 1,045,000
Correcting trial balance errors

• Throughout the accounting process, total debits should always equal total credits. If not, there is an error.
Computerized accounting systems eliminate many errors because most software won’t let you make a journal entry that
doesn’t balance. But computers cannot eliminate all errors because humans can input the wrong data.
Errors can be detected by computing the difference between total debits and total credits on the trial balance. Then
perform one or more of the following actions:
1 Search the trial balance for a missing account. For example suppose the accountant omitted Drawing from the
trial balance above.
Total debits would then be P945,000 compared to total credits of P1,045,000. Trace each account from the ledger to the
trial balance, and you will locate the missing account.
2 Divide the difference between total debits and total credits by 2. A debit treated as a credit, or vice versa,
doubles the amount of error. Suppose the accountant posted a P500 debit as a credit. Total credits contain the P500,
and total debits omit the P500. The out-of-balance amount is P1,000. Dividing the difference by 2 identifies the P500
amount of the transaction. Then search the trial balance for a P500 transaction and trace to the account affected.
3 Divide the out-of-balance amount by 9. If the result is evenly divisible by 9, the error may be a slide (example:
writing P1,000 as P100) or a transposition (example: treating P1,200 as P2,100). Suppose Company printed the P100,000
Drawing as P1,000,000 on the trial balance—a slide-type error. Total debits would differ from total credits by P900,000
(P1,000,000-P100,000 = P900,000). Dividing P900,000 by 9 yields P100,000, the correct amount of withdrawals. Trace
P100,000 through the ledger until you reach the Drawings account. You have then found the error.
To illustrate the process of locating error, we use the trial balance of the Company above. Please take note the
independent assumptions per number.
1. Search the trial balance for a missing account. For example suppose the accountant omitted Drawing from the
trial balance above.
Incorrect trial balance Corrected trial balance
Dr. Cr. Dr. Cr.
Cash 521,500 Cash 521,500
Accounts
Accounts Receivable -
- Receivable
Supplies 500 Supplies 500
Land 400,000 Land 400,000
Accounts Payable Accounts Payable
- -
Owner's Capital 1,000,000Owner's Capital 1,000,000
Owner, Drawing Owner, Drawing 100,000
Service Revenues 45,000 Service Revenues 45,000
Salaries Expense 12,000 Salaries Expense 12,000
Rent Expense 10,000 Rent Expense 10,000
Utilities Expense 1,000 Utilities Expense 1,000
Totals 945,000 1,045,000 Totals 1,045,000 1,045,000
Total debits would then be P945,000 compared to total credits of P1,045,000. Trace each account from the
ledger to the trial balance, and you will locate the missing account since 1,045,000-945,000 = P100,000, the amount of
Drawing.
2. Suppose the accountant posted Supplies, P500 debit as a credit.

Dr. Cr. Dr. Cr.
Cash 521,500 Cash 521,500
Accounts Accounts
- -
Receivable Receivable
Land 400,000 Land 400,000
- -
Owner's Capital 1,000,000 Owner's Capital 1,000,000
Owner, Drawing Owner, Drawing 100,000
100,000
Totals 1,044,500 1,045,500 Totals 1,045,000 1,045,000
Divide the difference between total debits and total credits by 2. A debit treated as a credit, or vice versa,
doubles the amount of error. Total credits contain the P500, and total debits omit the P500. The out-of-balance
amount is P1,000. Dividing the difference by 2 identifies the P500 amount of the transaction. Then search the
trial balance for a P500 transaction and trace to the account affected which is Supplies.
3. Suppose the accountant recorded Salaries Expense as 21,000 rather than 12,000. This is a transposition error
and the difference between total debit and total credits will be exactly divisible by 9.
Dr. Cr. Dr. Cr.
Cash 521,500 Cash 521,500
Accounts Accounts
- -
Land 400,000 Land 400,000
- -
Owner, Drawing 100,000 Owner, Drawing 100,000

Totals 1,054,000 1,045,000 Totals 1,045,000 1,045,000
Divide the out-of-balance amount by 9. The difference between 1,054,000 and 1,045,000 is P9,000. P9,000 is exactly
divisible by 9.
4. Suppose. Instead, the accountant recorded Salaries Expense as 1,200 rather than 12,000. This is a slide error
and the difference between total debit and total credits will be exactly divisible by 9 just like a transposition
error.

Dr. Cr. Dr. Cr.
Cash 521,500 Cash 521,500
Accounts Accounts
- -
Land 400,000 Land 400,000
- -
Owner, Drawing 100,000 Owner, Drawing 100,000
Totals 1,034,200 1,045,000 Totals 1,045,000 1,045,000
The difference between 1,034,200 and 1,045,000 is P10,800. P10,800 divided by 9 is 1,200, the erroneous amount
posted for Salaries Expense.
If errors are not classified as those discussed above, we should:
1. Compare the amounts and accounts in the trial balance with those in the ledger and correct any discrepancies
and omissions.
2. Recheck the footing of the amounts in the ledger.
3. Trace the postings from the journal to the ledger.
4. Recheck journal entries and ensure total debits equal total credits.

Journalizing Up To Trial Balance Readings

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ACT1101 FAR EASTERN UNIVERSITY PROF.

The Accounting Information System

Input Process Output

Steps in the accounting cycle

This chapter will discuss steps 2-4, recording business transactions.

The Account, the Ledger, and the Journal

Sample Chart of Accounts for a Small Company

Owner's Equity Accounts

Operating Revenue Accounts

Operating Expense Accounts

Non-Operating Revenues and Expenses, Gains, and Losses

Debit (dr) credit (cr)

If we'll rearrange accounts,

Recording journal entries

1. Date of the transaction

Transaction 1: Initial investment made by the owner is P1,000,000.

Assets Dr.(Cr.) Liabilities Owner’s Equity

The journal entry will be

An increase in cash (asset) is debit and increase in capital is credit.

Transaction 2. Purchase of land

The journal entry will be

An increase in Land (Asset) is debit and decrease in Cash (Asset) is credit.

Transaction 3: Purchase of Office Supplies on account

Assets Liabilities Owner’s Equity

The journal entry will be

Transaction 4: Rendered services for cash P15,000

Assets Liabilities Owner’s Equity

The journal entry will be

Transaction 5: Rendered services on account P30,000

Assets Liabilities Owner’s Equity

The journal entry will be

Assets Liabilities Owner’s Equity

.The journal entry will be

Transaction 7: Payment on Account

The journal entry will be

Transaction 8: Personal Transaction

Transaction 9: Collection of Accounts Receivable P30,000

The journal entry will be

An increase in Cash (Asset) is debit and decrease in Accounts Receivable(Asset) is credit.

Transaction 10: Owners withdrawal of P100,000

The journal entry will be

Posting (Copying Information) from the Journal to the Ledger

Flow of accounting data from journal to ledger

From General Journal

To the General ledger (partial)

The ledger accounts of the business after posting,

9-Jan 30,000 7-Jan 500

For th month ended January 31, 2014

Owner's Capital 1,000,000

Owner, Drawing 100,000

Service Revenues 45,000

Salaries Expense 12,000

Rent Expense 10,000

Utilities Expense 1,000

Totals 1,045,000 1,045,000

Correcting trial balance errors

Totals 945,000 1,045,000 Totals 1,045,000 1,045,000

2. Suppose the accountant posted Supplies, P500 debit as a credit.

Rent Expense 10,000 Rent Expense 10,000

Incorrect trial balance Corrected trial balance

If errors are not classified as those discussed above, we should:

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