PHILIPPINE STATE COLLEGE OF AERONAUTICS

INSTITUTE OF LIBERAL ARTS AND SCIENCES

AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

LEARNING

MODULE 09:
Introduction to
Bookkeeping

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

TABLE OF CONTENTS

Modul
Title Page
e No.

Introduction to Bookkeeping 9 1

Learning Outcomes 9 11

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

Basically, bookkeeping is the process of recording and organizing a business’s

financial transaction, and a bookkeeper is a person responsible for that process.
Bookkeeping is the primary way business owners can figure out if their business is
profitable: keeping an eye on your numbers lets you identify financial challenges
early on and address them before they blossom into full-fledged crises. Bookkeeping
also helps you identify areas of profit expansion-areas you might have notice without
clear financial reports you can interpret easily.

In general, a bookkeeper records transaction sends invoices, makes payments,

manages accounts, and prepares financial statements. Bookkeeping and accounting
are similar, but bookkeeping lays basis for the accounting process-accounting
focuses more on analyzing the data that bookkeeping merely collects.

1. Understanding Business Accounts

In the world of bookkeeping, an account doesn’t refer to an individual bank

account. Instead, an account is record of all financial transactions of a certain type,
like sales or payroll.

There are five basic types of accounts:

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

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

Bookkeeping begins with setting up each necessary account so you can

record transactions in the appropriate categories. You likely won’t have the same
accounts as the business next door, but many accounts are common. The table
shows some frequently used small-business accounts and their type.

ACCOUNT 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 state Asset
Rent expense Expense
Service income Revenue
Retained earnings Equity
Salaries and wages Expense
Sales income Revenue
Supplies Asset
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 another, back in the day, charts of accounts were recording 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.

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

There are three main methods for creating a GL:

 Spreadsheet software (e.g., Excel)

 Desktop accounting bookkeeping software (e.g., Quickbooks Desktop)
 Cloud-based bookkeeping software (e.g., Quickbooks Online, Wave)

Spreadsheet software is the cheapest option; Google Sheet doesn’t cost a

monthly fee, but trying to craft your own general ledger in a spreadsheet program
can easily spiral into disaster.

Desktop bookkeeping software usually requires high-up front fee, but the
software is then yours to keep. With online, cloud-based bookkeeping software, you
have to pay monthly fee to keep your online subscription, but it’s a much lower cost
than that of desktop software.

Alternatively, you can pay an accountant, bookkeeper, or outsourced

accounting company to manage your accounts and ledger for you.

2. Decide on Bookkeeping Method

If you plan to do your own books in the 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 make to use single-entry bookkeeping or
double-entry bookkeeping?

With single-entry bookkeeping, you enter transaction only once. If a

customer pays you a sum, you enter that sum in your asset column only. Makes
sense, right? This method can work if your business is simple-as in, very, very simple.
If you work out of your home, don’t have any equipment or inventory to offer, and
don’t venture too frequently into the realm of cash transactions, you might consider
single-entry bookkeeping.

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

However, most bookkeeping is done using the double-entry accounting

system, which is sort of like Newton’s Third Law of Motion, but for finances.
Newton’s laws hold that “for every action (in nature), there is an equal and opposite
reaction”. Likewise, in double-entry accounting, any transaction in one account
requires an equal and opposite entry in another account. It isn’t physics, but for
managing a business, it’s just as important.

In the double-entry bookkeeping system, you’ll record two entries for each
transaction: a debit (Dr) and a credit (Cr). Debits and credits are recorded as journal
entries in the ledger. The debit is usually recorded first (on the left), followed by the
credit (on the right)

A debit doesn’t necessarily mean cash flowing out; likewise, credit isn’t
necessarily money you’ve earned. The type of account defines whether a transaction
either debits or credits that account

Double entry bookkeeping is definitely more challenging than single-entry

bookkeeping, but don’t let the difficulty deter you. Double-entry ensures your books
are always balance, which means you’ll be tipped off immediately if profits start
dipping. Plus, most accounting software starts you off with double-entry bookkeeping
anyway. With that software all ready to go, you can tackle double-entry bookkeeping
with no sweat.

4. Record every Financial Transaction

You’ve created your set of financial accounts and picked a bookkeeping

system-now it’s time to record what’s actually happening with your money.

Each debit and credit transaction must be recorded correctly and in the right
account. Otherwise, your account balances won’t match and you won’t be able to
close your books.

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

Account Type Debit recorded for… Credit recorded for…

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

To record a transaction, first determine the accounts that will be debited and
credited. For example, imagine that you’ve just purchased a new point-of-sale
system for your retail business. You paid for the system, which is cost Php 2,000 in
cash.

The transaction will affect two accounts: cash (an asset account) and
equipment (also an asset). Because you’ve decreasing your cash and increasing
your equipment, you would record a Php 2,000 debit (on the left) for the equipment
account and a Php 2,000 credit for cash account (on the right).

Note that the journal entries don’t include specific details about the item,
vendor, or biller; you just track debits and credits by account.

The General Journal

The general journal is a chronological record of the entity’s transactions. A
journal entry shows all the effects of a business transaction in terms of debits or
credits. Each transaction is initially recorded in a journal rather than directly in the
ledger. A journal is called the book of original entry. The nature and volume of
transactions of the business determine the number and type of journals needed. The
general journal is the simplest.

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

Format
1. Date. The year and month are-not-month changes or a new page is needed.
2. Accounts Titles and Explanations. The account to be debited is entered at
the V extreme left of the first line the account to be credited is entered slightly
indented on the next line. A brief description of the transaction is usually made
on the line below the credit. Generally, skip a lie after each entry.
3. P.R. (Posting Reference). This will be used when the entries are posted, that
is until the amounts are transferred to the relate ledger accounts. The posting
process will be described later.
4. Debit. The debit amount for each account is entered in this column
5. Credit. The credit amount for each account is entered in this column.

Assume that Angelica Punzalan established its restaurant with an initial

investment of Php 200,000 on June 1.

The journal entry is shown below:

Date Accounts Titles and P.R. Debit Credit

Explanation
1. 2013
2. June 1 Cash
3. Punzalan, Capital 200,000
4. Initial Investment. 200,000
5.

Chart of Accounts

A listing of all the accounts and their account numbers in te ledger is known as
the chart of accounts. The chart is arranged in the financial statement order, that is,
assets first, followed by liabilities, owner’s equity, income, and expenses. The
accounts should be numbered flexibility to permit indexing and cross-referencing.

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

When analyzing transactions, the accountant refers to the chart of accounts to

identify the pertinent accounts to be increased or decreased. If an appropriate
account title is not listed in the chart, an additional account may be added. Presented
below is the chart of accounts for the illustration:

Punzalan Restaurant
Chart of Accounts
Balance Sheet Accounts Income Statement Account
Assets Income
110 Cash 410 Service Income
120 Accounts Receivable 420 Interest Income
130
140
150
160
Liabilities Expenses
210 Accounts Payable 510 Insurance expense
220 Interest Payable 520 Interest expense
230 Unearned service revenue 530 Rent expense
540 Salaries and wages
550 Supplies expense
560 Utilities expense
Owner’s Equity
310 Punzalan, Capital
320 Punzalan Withdrawal
330 Income Summary

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 “balance”.

You have been recording journal entries to accounts as debits and credits. At
the end of the period, you’ll “post” these entries to the accounts themselves in the
general ledger and adjust the account balances accordingly.

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PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

For example, if over the course of the month your cash account has had Php
3,000 in debits (increases) and Php 5,000 in credits (decreases), you would adjust
the cash account balance by a total of Php 2,000 (as a decrease).

Follow this method to adjust the balances for each account in your ledger. At
the end of this process, you’ll have what’s called an “adjusted trial balance”. When
you combine account types, the adjusted balances should mee the accounting
equation:

Assets = Liabilities + Equity

If two sides of the equations don’t match, you’ll need to go back through the
ledger and journal entries to find errors. Post corrected entries in the journal and
ledger, then follow the process again until the account accounts are balanced. Then
you’re ready to close the books and prepare financial reports.

The General Ledger

The general ledger is the principal book in which the commercial transactions
of a company are recorded. Before the days of accounting software, bookkeepers
and accountants actually kept physical nooks, and each ledger was a separate
physical book.

However, times have changed. A simpler definition is probably more

appropriate now too, especially with regards to ledgers and T-accounts.

So nowadays, one could say that: A ledger is simply a whole bunch of T-

accounts grouped.

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 PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES
AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping

6. Prepare Financial Reports

Now that you’ve balances 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 the picture to make decisions
about your business’s future.

Here are some of the most common financial reports created in bookkeeping:

 Balance Sheet. This document summarizes your business’s assets, liabilities, and
equity at a single period of time. Your total assets should equal the sum of all
liabilities and equity of accounts. The balance sheet provides a look at the current
health of your business and whether it has the ability to expand or needs to
reserve cash.
 Profit and Loss (P&L) Statement. Also called income statement. This report
breakdown business revenues, costs, and expenses over a period of time (e.g.,
quarter), the P& helps you compare your sales and expenses and make forecasts.
 Cash Flow Statement. The statement of cash flow is similar to the P&L =, but it
doesn’t include any non-cash items such as depreciation. Cash flow statements
help show where your business is earning and spending money and its immediate
viability and ability to pay bills.

Bookkeeping software helps you prepare these financial reports, may in real-
time, this can be a lifetime for small-business owners who need to make quick
financial decisions based on the immediate health of their business.

LEARNING OUTCOMES:
At the end of the discussion, the student must be able to:

 Understand what is bookkeeping

 Understand the business accounts
 Identify the different types of accounts
 Understand the double-entry booking system
 Perform key bookkeeping tasks

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