Basic Accounting Module 3

ENTREP BC1 | Basic Accounting Page 1
Module 3
Lesson 1
Types of Major Accounts and
Double Entry System
Learning Outcomes
At the end of the lesson, you should be able to:
1.State the five major accounts.

2.Give examples of each major type of account.
3.Explain the Double-Entry System
Time Frame: 9 hours
Introduction
In this particular lesson, you will be introduced to the different types of major accounts
and to the double entry system.

MODULE3LESSON1:TYPESOFMAJORACCOUNTS
ANDDOUBLEENTRYSYSTEM
Another example, "Building". Suppose a company
What is an acquires a building and pays in cash. That

transaction would be recorded in the "Building"
Account? account for the acquisition of the building and a

reduction in the "Cash" account for the payment
In accounting, an account is a descriptive made.
storage unit used to collect and store

Now, let's take a look at the accounting elements.
information of similar nature.
Assets
For example, "Cash".
Assets refer to resources owned and controlled by

Cash is an account that stores all transactions that
the entity as a result of past transactions and
involve cash receipts and cash payments. All cash
events, from which future economic benefits are
receipts are recorded as increases in "Cash" and all
payments are recorded as deductions in the same expected to flow to the entity. In simple terms,
account. assets are properties or rights owned by the

business.

Income encompasses revenues and gains. Net income (Net Loss) refers to all income minus all
expenses.
Revenues refer to the amounts earned from the
company’s ordinary course of business such as The Double Entry Accounting System
professional fees or service revenue for service
companies and sales for merchandising and It is one of the basic foundations upon which the
manufacturing concerns. steps in the accounting cycle and other accounting
principles are based. The double entry accounting
Gains come from other activities, such as gain on system emerged as a result of the industrial
sale of equipment, gain on sale of short-term revolution. Merchants in the olden times recorded
investments, and other gains. transactions in simple lists, similar to what we call
today as single entry method. Through the ages,
Income is measured every period and is ultimately business became more and more complex, hence,
included in the capital account. Examples of income the development of more effective ways to keep
accounts are: Service track of business transactions.
Revenue, Professional Fees, Rent Income,
Commission Income, Interest Income, Royalty The first accounts of the double entry bookkeeping
Income, and Sales. system was documented by Luca Pacioli, a
Franciscan monk and hailed as the Father of Modern
Expense Accounting.
Expenses are decreases in economic benefit during Under the double entry bookkeeping system,
the accounting period in the form of a decrease in business transactions are recorded with the premise
asset or an increase in liability that result in decrease that each transaction has a two-fold effect – a value
in equity, other than distribution to owners. received and a value given.
Expenses include ordinary expenses such as Cost of To better understand the double entry method, let
Sales, Advertising Expense, Rent Expense, Salaries us first take a look at the single entry system.
Expense, Income Tax, Repairs Expense, etc.; and
losses such as Loss from Fire, Typhoon Loss, and Loss
from Theft. Like income, expenses are also measured
every period and then closed as part of capital.

The single entry bookkeeping system does not explicitly record the two-fold effect of
transactions. Under this method, separate books are maintained for the company's basic
accounts such as cash, receivables, and payables. Therefore, the accounting records are
incomplete.
For example, consider the following transactions:
1.On June 1, 2020, Mr. A invested P1,500,000 to start a bakeshop business.

2.On October 5, the company purchased a computer for the office, P50,000.
3.On October 8, the company rendered services and received P25,000.
Under the single entry, the company may use a cashbook to record its cash receipts and
disbursements. After recording the above transactions, the cashbook will look this:
We can readily determine the cash balance using this recording method.
However, it will be difficult to determine the balances of other accounts such as revenues
and expenses unless the company maintains separate books for them as well.
An important note to consider here is that a valid set of financial statements can still be
prepared even if the accounting system is incomplete. But, it will require additional work to
reconstruct the accounts to conform to the double-entry method.
Under the double entry method, every transaction is recorded in at least two accounts.
Once all transactions are processed into the accounting system, the balances of all accounts
will be readily available.
All accounts have a debit and a credit side. Debit means left and credit means right.

Because of the two-fold or duality effect of transactions, the total effect on the left will
always be equal to total the effect on the right. Hence, the famous line "debit equals credit".
The rule: To increase an asset, you debit it; to decrease an asset, you credit it. The opposite
applies to liabilities and capital. To increase a liability or a capital account, you credit it; to
decrease a liability or capital account, you debit it. Expenses are debited when incurred and
income is credited when earned.
Here's a table to summarize that:
Transactions are recorded using journal entries in the journal. A journal entry is a record
showing the date of the transaction, the account/s debited, the account/s credited, their
respective amounts, and an explanation to describe the transaction.

MODULE3LESSON2:THEACCOUNTINGCYCLE:
UNDERSTANDINGANDANALYZINGBUSINESSTRA
NSACTIONS
ACCOUNTING
SYSTEM
- must record all business transactions to ensure complete and reliable information when
the financial statements are prepared.
A business transaction is an activity or event that can be measured in terms of money and which
affects the financial position or operations of the business entity. A business transaction has an
effect on any of the accounting elements – assets, liabilities, capital, income, and expense.
1. Be a transaction involving the business entity
The separate entity concept or accounting entity assumption clearly establishes a distinction
between transactions of the business and those of its owner/s.
If Mr. A, owner of an Advertising company, buys a car for personal use using his own money, it
will not be reflected in the books of the company. Why? Because it does not have anything to

do with the business. Now if the company purchases a delivery truck, then that would be a
business transaction of the company.
If Mr. A invests P1,000,000 into the company, would that be recorded in the books of the
business? Ask this: Does it have anything to do with the company? Yes. Then, that should be
considered as business transaction and must be recorded.
In any case, always remember that a business is treated as an individual entity, separate and
distinct from its owners.
2. Be of a financial character (in a certain amount of money)
Transactions must involve monetary values, meaning a certain amount of money must be
assigned to the elements or accounts affected. For example, B. Company rendered services and
expects to collect P500,000 after 20 days. The income and receivable can be measured reliably
at the P500,000. The mere request (order) of a customer is not a recordable business
transaction. There should be an actual sale or performance of service first to give the company
a right over the income or revenue.
3. Have a dual or "two-fold" effect on the accounting elements
Every transaction has a dual or two-fold effect. For every value received, there is a value given;
or for every debit, there is a credit. This is the concept of double-entry accounting.
For example, B. Company purchased tables and chairs for P300,000. The company received
tables and chairs thereby increasing its assets (increase in Office Equipment). In return, the
company paid cash; thus, there is an equal decrease in assets (decrease in Cash).

4. Be supported by
a source
document
Debit and Credit

Normal
Balance
And third, we
define what we call
"normal balance".
Each account has a
debit and a credit
side. You could
picture that as a big
letter T, hence the

term "T-account". Again, debit is on the left Example
side and credit on the right. Normal balance Now what is the significance of the "normal
is the side where the balance of the account balance"?
is normally found.
When you place an amount on the normal
Asset accounts normally have debit balance side, you are increasing the account.
balances, while liabilities and capital If you put an amount on the opposite side,
normally have credit balances. Income has a you are decreasing that account. Therefore,
normal credit balance since it increases to increase an asset, you debit it. To
capital . decrease an asset, you credit it. To increase
liability and capital accounts, credit. To
On the other hand, expenses and decrease them, debit.
withdrawals decrease capital, hence they
normally have debit balances.
Let us take Accounts Receivable. Accounts Receivable is an asset account.

Again, asset accounts normally have debit balances. Therefore, to increase Accounts
Receivable you debit it. To decrease Accounts Receivable, you credit it.
Another example – let's take Notes Payable. It is a liability account. Liability accounts
normally have credit balances. Thus, if you want to increase Notes Payable, you credit it. If
you want to decrease Notes Payable, you debit it.
The same rules apply to all asset, liability, and capital accounts.
Accumulated Depreciation is a contra-asset account (deducted from an asset account).
For contra-asset accounts, the rule is simply the opposite of the rule for assets.
Therefore, to increase Accumulated Depreciation, you credit it.
Chart of Accounts
A chart of accounts is a list of all accounts used by a company in its accounting system.
The chart of accounts will depend upon the needs and preferences of the company
using it. Accounts are classified into assets, liabilities, capital or equity, income, and
expenses; and each is given a unique account number. A coding system is used to
organize the accounts.

Sample chart of accounts for a sole proprietorship business:
Chart of Accounts Example
Chart of Accounts
ASSETS (100-109)
100 Cash
101 Accounts Receivable
101 Allowance for Doubtful Accounts
102 Notes Receivable
103 Interest Receivable
104 Service Supplies
105 Leasehold Improvements
106 Furniture and Fixtures
107 Accumulated Depreciation – Furniture and Fixtures
108 Service Equipment
109 Accumulated Depreciation – Service Equipment
LIABILITIES (200-299)
200 Accounts Payable

201 Notes Payable
202 Salaries Payable
203 Rent Payable
204 Interest Payable
205 Unearned Revenue 206 Loans Payable

OWNER'S EQUITY (300-399)
300 Mr. A, Capital

301 Mr. A, Drawing
REVENUES (400-499)
400 Service Revenue

401 Interest Income
402 Gain on Sale of Equipment
499 Income Summary
EXPENSES (500-599)
500 Rent Expense

501 Salaries Expense
502 Supplies Expense
503 Utilities Expense 504 Interest Expense
505 Taxes and Licenses
506 Depreciation Expense
507 Doubtful Accounts Expense
Additional accounts can be added as the need arises. For bigger companies, the accounts
may be divided into several sub-accounts.
For example, employee salaries may have various accounts for different departments and be
included in the chart of accounts as:
501.1 Salaries Expense – Administrative

501.2 Salaries Expense – Servicing 501.3 Salaries Expense – Marketing, etc.
The Accounting Cycle

The life of a business is divided into accounting periods of equal length. A standard
sequence of accounting procedures is repeated for each period. These uniform procedures
done to accomplish the accounting process are referred to as the accounting cycle.

The Ledger Accounts after Posting
The debit or credit balance of each account is determined at the end of the accounting
period in order to prepare the trial balance. The debit column and the credit column of
each account are added to get the balance of each account. If an account's total debit
exceeds total credit, then the account has a debit balance. On the other hand, if the
account's total credit exceeds the total debit, then the account has a credit balance.
For illustration purposes, the ledger accounts of Anime World Gallery after posting, are
presented as follows:

MODULE3LESSON3:THEACCOUNTINGCYCLE:
ADJUSTINGJOURNALENTRIES
Definition and Importance of Adjusting Journal Entries
Adjusting Journal Entries are entries used to update the accounts prior to the
preparation of Financial Statements because they affect more than one
accounting period. Transactions are apportioned properly between the accounting
periods affected. The accounts affected are adjusted so that there will be no
overstatement or understatement of balance sheet items and income statement
items.
The process of determining an entity's net income or net loss requires certain
income and expense accounts to be apportioned over several accounting periods.
According to the accrual principle, income is recognized at the time it is actually
earned and expense is recognized at the time it is actually incurred or used. Thus,
a receipt of cash does not necessarily mean a recognition of an expense.
Prepayments - are expenses already paid but not yet incurred or used.
Asset Method
Journal entry upon payment
Adjusting Journal Entry at the end of the accounting period
Note: The amount on the adjusting journal entry represents the expired or used
portion of the prepayment.

Unearned or deferred income is income already received but not yet earned.
Liability Method
Journal entry upon receipt of cash.
Adjusting journal entry at the end of the accounting period
Note: The amount of the Adjusting Journal Entry is the earned portion of the amount
initially received.
Example 1
On August 1, Dr. Yee received P 90,000 for dental fees to be rendered in the next 6
months. Give the adjusting journal entry at the end of Sept.
Journal Entry upon receipt of cash on August 1
Adjusting Journal Entry on September 30
Computation
The P 90,000 amount of cash received represents 6-month dental services to be
rendered. Divide P 90,000 by 6 to get the monthly dental fee. Multiply the result by
2.

Note: What you have gotten is the annual depreciation. Since the building was
completed on June 1, you will have to apportion the annual depreciation of P 150,000 by
dividing it by 12 to get the monthly depreciation. Multiplying it by 7 months, you get the
depreciation of the building from June 1 to December 31, 2020.
An alternative method in recording prepayments is to initially record them as an expense
instead of an asset.

Expense Method
Journal Entry upon payment
Adjusting
Journal Entry at the end
of the accounting
period
Note: The amount of the adjusting journal entry represents the unexpired or unused portion
of the prepayment.
Example
On April 30, 2020, X Co. paid P 36,000 insurance premium for two years. Give the
Adjusting Journal Entry on June 30, 2020.
Journal Entry upon payment on April 30.
Adjusting Journal Entry at the end of the accounting period June 30,
2020
P 33,000 is therefore the prepaid insurance from July 1 to April 30, 2022.

Analysis: When you paid P 36,000 for the two-year insurance on April 30, you debited the
expense account Insurance Expense representing 24 months insurance. On June 30, the end
of the accounting period, the P 36,000 Insurance Expense is not really your insurance
expense for the year. It includes the 22 months unexpired or unused portion (July 1, 2020 to
April 30, 2022). Hence, an adjusting entry is necessary to recognize the asset portion by
debiting Prepaid Insurance and decreasing the balance of Insurance Expense by crediting it.
The effect of the adjusting entries on the ledger accounts after posting is the same regardless
of the method used.

An alternative method in recording deferrals is to initially record them as an income instead
of liability.
Income Method
Journal Entry upon receipt of cash
Adjusting Journal Entry at the end of the accounting period.

STEPS IN PREPARING THE
WORKSHEET
In each section of the worksheet, there are two columns (by pair) provided which are
intended for the debit and credit amounts.
Real Accounts (Balance Sheet Accounts) involves Assets, Liabilities, Equities
Nominal Accounts (Income Statement Accounts) involves Income and Expenses Procedures:
Step 1 – First indicate the heading and then copy the figures of the Trial Balance “as is”
instead of a trial balance, write “Unadjusted Trial Balance”.
Step 2 – Plot your adjusting journal entries in the adjusted column. The accounts that are not
found in the unadjusted trial balance but are affected in adjustments are listed down below
the adjustments column.
Step 3 – The Merchandise Inventory, January 1 (Beginning) is extended to the debit column of
the Income Statement which signifies an addition to cost of purchases while the Merchandise
Inventory, December 31 (Ending) is extended both the credit column of the Income
Statement and debit column of the Balance Sheet without passing-through the adjustment
section.
Step 4 – Extend to the Balance Sheet section of the Assets, Liabilities and Owner’s Equity
accounts and to Income Statement section the Income, Cost and expenses including those
accounts that are listed underneath the total of the unadjusted trial balance.
Step 5 – When you total the columns of the Income Statement and Balance Sheet sections of
your worksheet, you’ll find out the two will not balance and the amount of difference
between the Income Statement and Balance Sheet are the same. The difference is either a
Profit and Loss. It is a profit if the total of the credit of the Income Statement is bigger than
the total debit, otherwise it is a loss. In the case of the Balance Sheet it will be the opposite.

Preparing a Statement of Owner's Equity affecting the capital account of a sole
proprietorship business. A sole
Step 1: Gather the needed information The proprietorship's capital is affected by
Statement of Changes in Owner's Equity is prepared four items: owner's contributions,
second to the Income Statement. owner's withdrawals, income, and
expenses.
Step 2: Prepare the heading Like any financial

statement, the heading is made up
of three lines. The first line contains the name of the
company. The second line shows the title of the
report. In this case, it would be Statement of For the year ended May 31, 2021
Changes in Owner's Equity, Statement of Owner's

Equity, or simply Statement of Changes in Equity.
Any of the three would be okay. The third line shows
the period covered. The report covers a span of time,
hence we use For the Year Ended, For the Quarter
Ended, For the Month Ended, etc. Some annual
financial statements omit the "For the Year Ended"
phrase.
Step 3: Capital at the beginning of the period Report

the capital balance at the beginning of the period For the year ended May 31, 2021
reported – or the amount at the end of the previous

period. Remember that the ending balance of the
last period is the beginning balance of the current
period.
Note: Since the company started in May 2, 2020, the

beginning balance of the capital account is zero. In
the second year of operations, an amount would
already be shown in the capital's beginning balance
(equal to the ending balance in the first year).
The "Statement of Owner's Equity", or "Statement of
Changes in Owner's Equity",
summarizes the items

Preparing a Balance Sheet company owns, how much liabilities it
owes to others, and its equity or capital
Step 1: Gather the needed information Like in any (assets minus liabilities).
other financial statement, we need to gather
information to be used in preparing a balance sheet.
Any source that shows updated account balances
can be used. The most appropriate tool for this,
however, would be the adjusted trial balance.
Step 2: Prepare the heading The first line contains

the name of the company. The second line shows the
title of the report. We can use either "Balance Sheet"
or "Statement of Financial Position". The third line
indicates the date of the report. The income
statement, statement of changes in equity, and
statement of cash flows use For the Year Ended, For
the Month Ended, For the Quarter Ended, etc.
However, we cannot use any of those phrases in a
balance sheet since we are not reporting information
for a period of time, but rather, information as of a
certain date. Therefore, we shall use "As of...".
Step 3: Report all company assets From the trial

balance, we take all assets and report them in the
balance sheet. Current assets are reported
separately from non-current assets. After which, we
will compute for the total current assets, the total
non-current assets, and the total assets. A single line
is drawn every time a mathematical operation is
made. The amount of total assets is double-ruled.
The "Balance Sheet", also known as "Statement of
Financial Position", shows a company's financial
condition as of a certain date. Financial condition is
presented by reporting how much assets the

statements

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ENTREP BC1 | Basic Accounting Page 1

1.State the five major accounts.

Time Frame: 9 hours

ENTREP BC1 | Basic Accounting Page 2

Another example, "Building". Suppose a company

What is an acquires a building and pays in cash. That

Account? account for the acquisition of the building and a

In accounting, an account is a descriptive made.

storage unit used to collect and store

Assets refer to resources owned and controlled by

account. assets are properties or rights owned by the

ENTREP BC1 | Basic Accounting Page 4

ENTREP BC1 | Basic Accounting Page 8

For example, consider the following transactions:

1.On June 1, 2020, Mr. A invested P1,500,000 to start a bakeshop business.

ENTREP BC1 | Basic Accounting Page 9

Here's a table to summarize that:

ENTREP BC1 | Basic Accounting Page 10

1. Be a transaction involving the business entity

ENTREP BC1 | Basic Accounting Page 16

2. Be of a financial character (in a certain amount of money)

3. Have a dual or "two-fold" effect on the accounting elements

ENTREP BC1 | Basic Accounting Page 17

Debit and Credit

ENTREP BC1 | Basic Accounting Page 18

Let us take Accounts Receivable. Accounts Receivable is an asset account.

ENTREP BC1 | Basic Accounting Page 19

Chart of Accounts Example

200 Accounts Payable

ENTREP BC1 | Basic Accounting Page 20

300 Mr. A, Capital

400 Service Revenue

500 Rent Expense

501.1 Salaries Expense – Administrative

The Accounting Cycle

ENTREP BC1 | Basic Accounting Page 21

ENTREP BC1 | Basic Accounting Page 32

Definition and Importance of Adjusting Journal Entries

Journal entry upon payment

Adjusting Journal Entry at the end of the accounting period

ENTREP BC1 | Basic Accounting Page 39

Journal entry upon receipt of cash.

Adjusting journal entry at the end of the accounting period

Journal Entry upon receipt of cash on August 1

Adjusting Journal Entry on September 30

ENTREP BC1 | Basic Accounting Page 42

ENTREP BC1 | Basic Accounting Page 47

Journal Entry upon payment on April 30.

ENTREP BC1 | Basic Accounting Page 48

ENTREP BC1 | Basic Accounting Page 49

Journal Entry upon receipt of cash

Adjusting Journal Entry at the end of the accounting period.

ENTREP BC1 | Basic Accounting Page 50

Real Accounts (Balance Sheet Accounts) involves Assets, Liabilities, Equities

ENTREP BC1 | Basic Accounting Page 64

Step 2: Prepare the heading Like any financial

Changes in Owner's Equity, Statement of Owner's

Step 3: Capital at the beginning of the period Report

reported – or the amount at the end of the previous

Note: Since the company started in May 2, 2020, the

ENTREP BC1 | Basic Accounting Page 68

Step 2: Prepare the heading The first line contains