Module IV

Summarizing Business Transactions: Accounting Cycle

Scope of the Module

Module IV of the subject contains only one lesson, namely: Posting to Ledger and
Trial Balance Preparation.

Overview of the Module

In Modules II and III, you have learned the effects of business transactions as
increases or decreases in the elements of the basic accounting equation. This is an
easy way to learn some basic relationships but it is not a practical approach because
the transactions entered into by business firms are many. Because of this, the effects of
the transactions must be classified and summarized before they can become useful
information.
The entries in the general journal give us the picture of transactions in terms of their
debits and credits on account found in the ledger. The process of transferring
information from a journal to ledger accounts is called posting. Posting distributes the
effects of transactions into accounting grouping to accomplish summarization of
transactions. After all entries for an accounting period have been posted to the ledger
accounts, a trial balance is prepared to prove the equality of debit and credits.

Objectives of the Module

After studying this module on business transactions and accounting cycle, you
should be able to:
1. distinguish an account from a ledger;
2. post entries to a ledger;
3. find the balance of each ledger account;
4. prepare a trial balance.

THE CHART OF ACCOUNTS

We have defined accounts as an accounting device used for grouping, classifying or

summarizing changes caused by transactions. The accounts are usually kept in a loose-
leaf binder or file.
This binder or file contains group of accounts and is known as the ledger. The listing
of all the accounts used by a business enterprise with their corresponding account
number is called chart of accounts. The chart of accounts is arranged according to
financial statement order. i.e., listing first the balance sheet accounts (assets, liabilities,

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capital) followed by income statement accounts (revenue cost and expenses). The
accounts are numbered by categories and grouped by categories. The numbering
follows also the financial statement order. The accounts would then be arranged in
numerical sequence in the ledger. In a chart of accounts with at least two digits, the first
represents the major division in the ledger and the succeeding digits represent the
position of the account in the division. For example, the assets may be numbered 1-20;
liabilities 21-30; capital 31-40; revenue 41-50; cost of merchandise 51-60; and
expenses 61-100. This is illustrated below:
Balance Sheet Accounts
1. Assets
11. Cash
12. Accounts Receivable
13. Merchandise Inventory
14. Office Supplies
15. Store Supplies
16. Prepaid Insurance
17. Delivery Equipment
18. Accumulated Depreciation, Delivery Equipment
19. Store Equipment
20. Accumulated Depreciation, Store Equipment
2. Liabilities
21. Accounts Payable
22. Salaries Payable
3. Capital
31. L. Galasinao, Capital
32. L. Galasinao, Drawing
33. Income Summary
4. Revenue
41. Sales
5. Cost of Merchandise
51. Purchases
6. Expenses
61. Salary Expense
62. Office Supplies Expense
63. Store Supplies Expense
64. Insurance Expense
65. Depreciation Expense
66. Miscellaneous Expense
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 Asset, liability, and proprietorship accounts are also called real accounts, balance
sheet accounts, or permanent accounts. Income and expense accounts are called
nominal accounts, profit and loss accounts, or temporary accounts.

Asset Titles
Cash
Accounts Receivable
Allowance for Bad Debts
Notes Receivable
Merchandise Inventory
Interest Receivable
Supplies on Hand or Unused Supplies Stationery, ballpens, erasers, postage stamps,
Prepaid Insurance
Land
Buildings
Furniture and Fixtures
Equipment
Delivery Equipment
Accumulated Depreciation
Coins, currency, and other cash equivalents either on
hand or deposited in the bank.
Obligations or debts collectible from customers for
services rendered or merchandise sold to them on
credit.
This is a contra-asset account to provide for
uncollectible amounts. It is deducted from Accounts
Receivable to present the amount still collectible from
debtors.
Obligations or debts collectible from customers and
other persons for goods or services sold or loan
granted, evidenced by a promissory note issued by
the customer.
Merchandise or goods on hand and ready for sale at
a profit.
Interest earned on notes on hand which has not been
received in cash.
typewriting papers and the like that are still unused.
Already paid insurance premiums which are
applicable in the future periods.
Land owned by the business used for building sites
and other business purposes.
Buildings owned and being used by the business
Tables, chairs, showcases, shelves, dividers, and
lighting fixtures.
This includes typewriters, computers, calculators,
duplicating machines, and the like.
This includes assets used for transporting
merchandise.
This is a valuation account that reduces the total cost
of the fixed asset. It is another contra-asset account
that represents the total amount of depreciation
expenses charged in the past and current periods.

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Liability Titles
Accounts Payable Obligation or debts payable by the business to other
parties for services acquired or merchandise
purchased on credit.
Notes Payable Obligations or debts payable by the business to other
parties evidenced by a promissory note issued by the
business.
Interest Payable Interest incurred but not yet paid.
Salaries Payable Amounts due to the employees for services they have
rendered.
Taxes and Licenses Payable Business taxes and licenses due and payable to the
government.
SSS and Medicare Payable Amount withheld from salary of employees plus the
company’s share due and payable to the Social
Security System.
Mortgage Payable Long-term obligations or debts payable by the
business to a bank or other financial institutions,
secured by certain assets of the business.

Proprietorship Titles
(Name of Owner), Capital
(Name of Owner), Drawing
Amount of capital contributions of the owner or
owners to the business.
Amount withdrawn by the owner from the assets of
the business for personal use.

Income Titles
Sales The principal revenue of both merchandising and
manufacturing concerns in selling goods to
customers.
Rent Income Revenue earned by apartment or condominium
owners, building lessors, and market stall lessors.
Service Income Money that a business receives in exchange for
providing a service. This also refers to fees earned by
the company – airlines and hotel income, professional
income/fees, etc.
Professional Fee Revenue earned by professionals such as CPAs,
doctors, lawyers, dentists, and the like for services
rendered.

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Commission Income Revenue earned by real estate brokers, insurance
agencies, travel agencies, and the like.
Interest Income Revenue earned for lending money.

Expense Titles
Cost of Sales Cost of goods purchased and sold or materials
manufactured and sold.
Salary Expense Amount paid for the services of employees
working in the firm.
Advertising Expense Cost of publications in the newspapers, calling
cards, billboards, and propaganda through radios
and televisions.
Supplies Expense Cost of stationery, ballpens, erasers, postage
stamp, and the like consumed or used.
Delivery Expense or Freight Out Revenue earned by real estate brokers, insurance
agencies, travel agencies, and the like.
Maintenance and Repair Expense Cost of repairing and servicing (materials plus
labor)
and certain assets like the building, office
equipment, and delivery equipment.
Light & Water or Utilities Expense The cost of electricity and water consumed.
Taxes & Licenses Expense Business taxes, licenses and other fees paid to
the city or municipal government.
Rent Expense Amount paid for the use of space for the store,
working area, or office of the business.
Bad Debts Expense Estimated amount of losses from uncollectible
accounts of the business.
Depreciation Expense Allocated cost of fixed assets like the building,
furniture & fixtures, equipment, and others over
their estimated useful life.
Interest Expense The cost of borrowing money used by the
business.

POSTING

Posting is Step 2 in the accounting cycle. It is the process of transferring the

accounting information from the journal to the ledger. The ledger could be a general
ledger or a three-column running balance ledger.
The steps in posting to the ledger are as follows:
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 1. Record the date and the amount in the appropriate debit or credit column. In
posting the ending balances of the preceding period (beginning of the current
period) in the ledger accounts for the current period: the date is usually the
first day of the current fiscal period; the word “balance” should be written in
the “Item” column; and a check mark(/) is to be placed in post reference (PR)
column.
2. Write in the PR column in the ledger, the page number of the journal.
3. Write in the PR column of the journal, the number of the ledger account.
Steps 2 and 3 result in cross-referencing – the numbers in the journal’s PR
column indicate where the amounts are posted in the ledger while the number
in the latter’s PR column indicates which page number of the journal the
ledger entries come from. For example, an entry in the PR column in the
journal of “L-10” means the amount in the journal has been posted to account
No. 10 in the ledger. In like manner, an entry of “J-1” in the PR column in the
ledger means the amount in the ledger came from Page 1 of the journal.
After all the entries for the month have been posted, each column in the ledger is
added. The totals are written in small figures in pencil under the respective column. This
is called pencil footing. After this, the difference between the debit and credit columns
is obtained. The difference is written in the “Item” section of either the debit or credit
column whichever has the greater total. If there is only one amount or entry in a
particular account, the amount which also represents the balance is no longer written in
the “Item” column.
The types of ledger are illustrated below:

Three-Column Running Balance Ledger for Cash

CASH ACCOUNT NO. 10
DATE ITEMS PR Dr. Cr. BALANCE

General Ledger for Cash

CASH ACCOUNT NO. 10
DATE ITEMS PR Dr. DATE ITEMS PR Dr.

An Example of Journalizing and Posting:

Transactions
2011
Feb. 3 The owner, L. Galasinao invested P 90,000 in his business.
4 Purchased supplies for cash, P 10,000.
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 5 Purchased office equipment, P 13,000 with P 3,000 down and balance on account.

The above transactions are written in the two-column journal as follows:

GENERAL JOURNAL PAGE 1
DATE DESCRIPTION PR Dr. CR
2011 Feb. 3 Cash 10 90,000
L. Galasinao, Capital 31 90,000
Initial Investment.
4 Supplies 15 10,000
Cash 10 10,000
Purchased supplies for cash.
5 Office equipment 20 13,000
Cash 10 3,000
Accounts Payable 21 10,000
Purchased office equipment – cash and
the balance on account.

The above entries are posted to the general ledger as follows:

CASH ACCOUNT NO. 10
DATE ITEMS PR Dr. DATE ITEMS PR Cr.
2011 2008
Feb. 3 J1 90,000 Feb. 4 J1 10,000
5 J1 3,000

SUPPLIES ACCOUNT NO. 15

DATE ITEMS PR Dr. DATE ITEMS PR Cr.
2011
Feb. 4 J1 10,000

OFFICE EQUIPMENT ACCOUNT NO. 20

DATE ITEMS PR Dr. DATE ITEMS PR Cr.
2011
Feb. 5 J2 13,000

ACCOUNTS PAYABLE ACCOUNT NO. 21

DATE ITEMS PR Dr. DATE ITEMS PR Cr.
2011
Feb. 5 J1 10,000

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L. Galasinao, Capital ACCOUNT NO. 200
DATE ITEMS PR Dr. DATE ITEMS PR Cr.
2011
Feb. 3 J1 90,000
As of the moment, nothing is written on the items column until we reach the end of
the accounting period. As an example of posting to a three-column running balance, we
shall take the cash account for illustration.
CASH ACCOUNT NO. 10
DATE ITEMS PR Dr. Cr. BALANCE
2011
Feb. 3 J1 90,000 90,000
4 J1 10,000 80,000
5 J1 3,000 77,000

Similar to the general ledger, nothing is written on the items column until such time
we reach the end of the accounting period. The balance column represents a debit
balance because the total of the debit column is more than the total of the credit column
and the account involved is an asset and an asset has a normal debit balance.
In a three-column running balance ledger, the balance of any account is immediately
known after posting a transaction whereas in the general ledger the balance is
determined only at the end of each month or year by adding the debit column and the
credit column and writing the totals in small figures or in pencil below the last amount
added. This is done in this manner in order not to confuse the amount as being a posted
amount from the journal. The difference is placed in the items column in either the debit
or credit side, whichever has the bigger total.
Throughout the study of Accounting 1, we will use the abbreviated or shorthand
version of ledger accounts called “T” accounts to picture in brief the effects that
transactions have on the accounting system. A “T” account is the simplest form of an
account which is divided into two by a vertical line. The left side is debit and the right
side is credit. It is called a “T” account because it looks like the letter “T”. Using the “T”
accounts to post our illustrative transactions it will appear in this manner.
CASH 10
2011 2011
Feb 3 9,000 Feb 4 10,000
5 3,000

77,000
SUPPLIES 15
2011
Feb 4 10,000
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 OFFICE EQUIPMENT 20
2011
Feb 5 13,000
ACCOUNTS PAYABLE 21
2011
Feb 5 10,000
L. GALASINAO, CAPITAL 31
2011
Feb 3 90,000

Note that the detailed information found in the general ledger is not found in the “T”
accounts because the “T” account is not considered a book of accounts.
Going back to the journal, remember that the account number is written in the folio
or post reference column only after the amounts had been transferred to the ledger. If it
is not done, it is possible that some amounts will be overlooked and not posted to the
ledger.
If the journal is known as the Book of Original Entry, the ledger is known as Book of
Final Entry. Therefore, there are only two types of Books of Accounts: Journal and
Ledger – general ledger or three-column ledger.

TRIAL BALANCE

Trial Balance preparation is Step No. 3 in the accounting cycle. It is a schedule or list
of ledger accounts with balances and compares the total debit and credit balances.
There are two types of trial balance. One is the trial balance of balances which is the
more commonly used type and the trial balance of totals. The former means only the
difference between the debit and the credit columns in each account is listed in the trial
balance, while the latter is one where the totals of both the debit and the credit columns
are listed in the trial balance.
If the totals of the debit and credit columns are equal, the trial balance is said to be
“in balance”. If not, it is simply “out of balance”. The preparation of the financial
statements should not be started unless the trial balance is “in balance”.

Proof Provided by the Trial Balance

The trial balance does not provide complete proof of the accuracy of the ledger. It
indicates only that debits and the credits are equal. This proof is of value, however,
because errors frequently affect the equality of debits and credits. It the two totals of a
trial balance are not equal, it is probably due to one or more of the following types of
errors:
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 1. posting an item twice;
2. posting to the wrong side of the account;
3. omission of posting;
4. wrong footings of the ledger;
5. wrong transferring of account from the ledger to the trial balance.
The existence of errors in the accounts may be determined in various ways:
1. by audit procedures
2. by chance discovery
3. through the medium of the trial balance
If the debit and the credit totals of the trial balance are not in agreement, the exact
amount of the difference between the totals should be determined before proceeding to
search for the error.
The amount of the difference between the two totals of a trial balance sometimes
gives a clue as to the nature of the error or where it occurred. For example, a difference
of 10, 100, 1,000 between two totals is frequently the result of an error in addition. A
difference between totals can also be due to the omission of a debit or a credit posting
or, if it is divisible evenly by 2, to the posting of a debit as a credit, or vice versa. For
example, if the debit and the credit totals of a trial balance are P 30,640 and P 30,236
respectively, the difference of P 404 may indicate that a credit posting of that amount
was omitted or that a credit of P 202 was erroneously posted as a debit.
Two other common types of errors are known as transpositions and slides. A
transposition is the erroneous rearrangement of digits, such as writing P 642 as P 462
or P 624. In a slide the entire number is erroneously moved one or more spaces to the
right or the left, such as writing P 642.00 as P 64.20 or P 6,240.00. If an error of either
type has occurred and there are no other errors, the discrepancy between the two trial
balance totals will be evenly divisible by 9.
A preliminary examination along the lines suggested by the preceding paragraphs
will frequently disclose the error. If it does not, the general procedure is to retrace the
various steps in the accounting process, beginning with the last step and working back
to the original entries in the journal.
While there are no stiff rules prevailing the procedures, the following plan is
suggested:
1. Verify the accuracy of the trial balance totals by re-adding the debits and
credits.
2. Compare the listings in the trial balance with the balances shown in the
ledger, making certain that no accounts have been omitted.
3. Re-compute the balance of each account in the ledger.
4. Trace the postings in the ledger back to the journal.
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 5. Verify the equality of debits and credits in the journal.

Illustration:
Bruno Photographic Studio
Trial Balance
June 30, 2011

Cash 1,631
Accounts Receivable 1,775
Supplies 1,850
Prepaid Rent 2,400
Photographic Equipment 17,500
Accounts Payable 2,000
Edgar Bruno, Capital 20,650
Edgar Bruno, Drawing 1,500
Sales 5,125
Salaries Expense 750
Miscellaneous Expense 369
27,775 27,775

Illustrative problem to demonstrate the three steps in the accounting cycle follows:
Listed below is the chart of Accounts of Balete Trucking Company:
Accounts Nos.

Cash 10
Accounts Receivable 11
Supplies 12
Trucks 20
Furniture and Equipment 21
Notes Payable 30
Accounts Payable 31
J Balete, Capital 40
J Balete, Drawing 41
Delivery Income 50
Gasoline and Oil Expense 55
Wages Expense 56
Repairs and Maintenance Expense 57
Utilities Expense 58
Rent Expense 59
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 Balete trucking was organized on March 2, 2011 for the purpose of delivering
cargoes. The following transactions took place during March 2011. Let us (1) journalize
the transactions; (2) post to “T” accounts; (3) prepare a trial balance.
March 2 J. Balete invested P 70,000 cash; 5 trucks at P 100,000 each truck.
3 Purchased Furniture and equipment, P 125,000 making a P 25,000 down-
payment; issued a P 60,000 promissory note and the balance on account.
8 Purchased supplies for cash, P 12,000.
20 Rendered delivery services to Marikit Publishing Co. for cash, P 60,000.
22 Rendered delivery services to ABC Studio on account for P 50,000.
24 Paid rent for the month of March, P 20,000.
25 Made a partial payment of accounts payable, P 8,000.
26 Collected P 15,000 from credit customers.
27 J. Balete withdrew cash of P 5,000 for personal use.
28 Paid gasoline and oil, P 30,000.
30 Paid wages of drivers, dispatchers and other personnel, P 25,000.
31 Received a bill for telephone, light and water, P 10,000 (use utilities expense)
31 Paid repairs and maintenance of trucks, P 18,000.
Step 1: Journalizing
2011
March 2 Cash 10 70,000
Trucks 20 500,000
J. Balete, Capital 570,000
Investment of owner.
3 Furniture and Equipment 125,000
Cash 10 25,000
Notes Payable 30 60,000
Accounts Payable 31 40,000
Purchased furniture and equipment.
8 Supplies 12 12,000
Cash 10 12,000
Purchased supplies for cash.
20 Cash 10 60,000
Delivery Income 50 60,000
Rendered services to Marikit Pub. Co.
22 Accounts Receivable 11 50,000
Delivery Income 50 50,000
Rendered delivery services to ABC Studio.

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 24 Rent Expense 59 20,000
Cash 10 20,000
Payment for rent.
25 Accounts Payable 31 8,000
Cash 10 8,000
Partial payment of account.
26 Cash 10 15,000
Accounts Receivable 11 15,000
Partial collection of account.
27 J. Balete, Drawing 41 5,000
Cash 10 5,000
Withdrawal by the owner.
28 Gasoline and Oil Expense 55 30,000
Cash 10 30,000
Payment for gasoline and oil.
30 Wages Expense 56 25,000
Cash 10 25,000
Payment for wages.
31 Utilities Expense 58 10,000
Accounts Payable 31 10,000
Received bill for telephone, light and water.
31 Repairs and Maintenance Expense 57 18,000
Cash 10 18,000
Payment for repairs andmaintenance.

Step 2: Posting
CASH 10
2011 2011
March 2 J-1 70,000 March 3 J-1 25,000
20 J-1 60,000 8 J-1 12,000
26 J-1 15,000 24 J-1 20,000
25 J-1 8,000
27 J-1 5,000
28 J-2 30,000
30 J-2 25,000
31 J-2 18,000
145,000 143,000
2,000

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 ACCOUNTS RECEIVABLE 11
2011 2011
March 22 J-1 50,000 March 26 J-1 15,000
35,000
SUPPLIES 12
2011
March 8 J-1 12,000
TRUCKS 20
2011
March 2 J-1 500,000
FURNITURE AND EQUIPMENT 21
2011
March 2 J-1 125,000
NOTES PAYABLE 31
2011
March 3 J-2 60,000
ACCOUNTS PAYABLE 20
2011 2011
March 25 J-1 8,000 March 3 J-1 40,000
31 J-2 10,000
42,000
J. BALETE, CAPITAL 40
2011
March 2 J-2 570,000
J. BALETE, DRAWING 41
2011
March 27 J-1 5,000
DELIVERY INCOME 50
2011
March 20 J-1 60,000
22 J-1 50,000
110,000
GASOLINE AND OIL EXPENSE 55
2011
March 28 J-2 30,000

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 WAGES EXPENSE 56
2011
March 30 J-2 25,000
REPAIRS AND MAINTENANCE EXPENSE 57
2011
March 31 J-2 18,000
UTILITIES EXPENSE 58
2011
March 31 J-2 10,000
RENT EXPENSE 58
2011
March 24 J-1 20,000

Step 3: The Trial Balance

Balete Trucking Company
Trial Balance
March 31, 2011
Dr. Cr.
Cash P 2,000
Accounts Receivable 35,000
Supplies 12,000
Trucks 500,000
Furniture and Equipment 125,000
Notes Payable P 60,000
Accounts Payable 42,000
J. Balete, Capital 570,000
J. Balete, Drawing 5,000
Delivery Income 110,000
Gasoline and Oil Expense 30,000
Wages Expense 25,000
Repairs and Maintenance Expense 18,000
Utilities Expense 10,000
Rent Expense 20,000
P 782,000 P 782,000

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Accounting 1
Module IV
SELF-PROGRESS CHECK TEST

Multiple Choice.
_____ 1. When a trial balance is in balance, it is usually assumed that:
a. No transactions were omitted.
b. The debits and credits in the ledger are equal.
c. The proper accounts were debited and credited.
d. All accounting procedures done are correct.
_____ 2. What bookkeeping procedure sorts the journal entries and summarizes
their debits and credits in the proper ledger accounts?
a. footing
b. journalizing
c. posting
d. ruling
_____ 3. A trial balance:
a. guarantees that all transactions are correctly recorded.
b. provides a check on the equality of debits and credits.
c. is usually prepared before the ledger is posted.
d. is prepared before a transaction is entered into the journal.
_____ 4. Which of the following statements is false?
a. The trial balance is prepared from the journal.
b. The ledger is the book of final entry.
c. Financial statements can be prepared from the trial balance.
d. Posting involves the transfer of entries from the journal to the ledger.
_____ 5. Journalizing consists of:
a. entering debits and credits in the appropriate ledger accounts.
b. recording the economic effects of a transaction in chronological order.
c. analyzing a transaction to determine its effect on assets and liabilities.
d. listing account balances to show debits and credits are equal.

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Accounting 1
Module 1V
ANSWER KEY TO THE SELF-PROGRESS CHECK TEST

1. b 2. c 3. b 4. a 5. b

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