Professional Documents
Culture Documents
Unit 2
Module 5
Unit 2 applies accounting concepts and principles into real business transactions. It will
cover deeper discussion on accounting equation, types of major accounts, books of accounts
and double entry system, business transactions and their analysis, posting to ledger and
adjusting entries.
This module covers topics like the basic accounting equation, the expanded
accounting equation and applications of the accounting equation.
Objectives
JOURNAL
The journal, also called the ”book of original entries,” is the accounting record where
business transactions are first recorded. Business transactions are recorded in the journal
through journal entries. This recording process is called journalizing.
Types of Journals
Journals can be classified into the following:
1. Special Journal – is used to record transactions of a similar nature. Special
journals simplify the recording and retrieving of information.
A business may have other special journals to suit its needs. For example: “Purchase
returns journal,” “Sales returns journal,” etc.
Acctg. Ed 1 - Financial Accounting & Reporting
2. General Journal – All other transactions that cannot be recorded in the special
journals are recorded in the general journal. Examples of such transactions include
purchases of inventory in exchange for notes payable, adjusting entries, correcting
entries, reversing entries, and the like.
If a business does not utilize special journals, all its transactions are recorded in the
general journal.
Examples:
a. You sold barbecue to a customer who promised orally to pay the sale price next
week.
b. You sold barbecue to a customer who immediately paid the sale price.
This transaction involves the receipt of cash; therefore, it is recorded in the cash
receipts journal.
c. You sold barbecue to a customer who promised in writing to pay the sale price next
week.
LEDGER
The ledger is a systematic compilation of a group of accounts. It is used to classify the
effects of business transactions on the accounts. The ledger is also called the “book of
secondary entries” or the “book of final entries” because it is used only after business
transactions are first recorded in the journals. The process of recording in the ledger is called
“posting.”
Kinds of ledgers
Ledgers can be classified into the following:
a. General ledger – contains all the accounts appearing in the trial balance.
b. Subsidiary ledger – provides a breakdown of the balances of controlling accounts.
*A controlling account (or control account) is one which consists of a group of accounts with
similar nature. The balance of the controlling account is shown in the general ledger, while
the balances of the accounts that comprise the controlling account are shown in the
subsidiary ledger. Not all account in the general ledger though are controlling accounts. Only
those whose balances necessarily need a breakdown are considered controlling accounts.
Example:
You sell barbeque on credit. The balance of credit sales not yet collected is P100,000. This
information is shown in Accounts Receivable, which is a controlling account in the General
Ledger.
Acctg. Ed 1 - Financial Accounting & Reporting
However, knowing only the total balance is insufficient. You need a breakdown of this
amount. You need information on which customers owe you money and the amount each
customer owes you. This information is provided by the Subsidiary Ledgers.
Summary:
Books of Accounts Description Function
1. Journal - Book of original entries - Journalizing
a. General Journal (Initial Recording)
b. Special Journals
2. Ledger - Book of secondary entries - Posting (Classifying)
a. General Ledger
b. Subsidiary Ledgers
General Journal
A general journal can have the following format:
Acctg. Ed 1 - Financial Accounting & Reporting
Other columns may be included, such as “posting reference” (P.Ref.) which is used to cross-
reference journal entries to the ledger, and journal entry number (GJ No.) which is used to
number the journal entries.
Special Journal
A special journal can have the following format:
DOUBLE-ENTRY SYSTEM
All transactions are recorded in the accounting records using the “double-entry system.”
Under this system, each transaction is recorded in two parts – debit and credit.
No transaction is recorded by a debit alone or a credit alone. For each amount that is debited,
there must be a corresponding amount that is credited, and vice-versa. This is in order for the
accounting equation to be balanced at all times. If at any time and accounting equation does
not balance, there is an error.
Acctg. Ed 1 - Financial Accounting & Reporting
Recall from our previous discussions that debit (Dr.) simply refers to the left side of an
account, while credit (Cr.) refers to the right side of an account.
To help us remember the normal balances of accounts, let us recall the expanded basic
accounting equation:
Notes:
- Assets which is on the left side of the equation has a normal debit balance.
- Liabilities, Capital (Equity) and Revenue (Income) which are additions on the right side
of the question have normal credit balances.
- Expenses which is a deduction on the right side of the equation has a normal debit
balance.
- Revenue (Income) increases equity, thus, it has a normal credit balance (same with
Capital). Expense decreases equity, thus, it has a normal debit balance (opposite of
that of equity).
- Another way to depict the normal balances of the accounts is as follows:
DEBITS CREDITS
Assets + Expenses = Liabilities + Capital (Equity) + Revenue (Income)
Acctg. Ed 1 - Financial Accounting & Reporting
To credit an account with a normal credit balance means to increase that account. To debit it
means to decrease it. Analyze the table below.
Debit Credit
The difference between the monetary totals of debits and credits to an account represents
the ending balance of that account. The minimum ending balance of an account is zero. This
occurs when the total debits equal total credits to an account.
If an asset or expense account results to an ending balance that is a credit, meaning the total
amount of debits is less than the total amount of credits, the account is said to have an
Acctg. Ed 1 - Financial Accounting & Reporting
abnormal balance. This means a recording error has been committed. A correction is
needed to eliminate the abnormal balance. This is also true when a liability, capital (equity), or
revenue (income) account results to an ending balance that is a debit.
Requirement: Using “T-account” analysis, compute for the ending balance of your cash.
Solution:
Cash
Dr. Cr.
Beg. Balance 2,000
Cash collections 10,000 8,000 Cash payments
Ending balance 4,000
Notes:
- The beginning balance is placed on the debit side because “Cash” is an asset
account and assets have a normal debit balance.
- Cash collections increase the balance of cash; thus, they are placed on the debit side.
- Cash payments decrease the balance of cash; thus, they are placed on the credit
side.
- The ending balance is the difference between the debit and credits in the account. It
is computed as follows: 2,000 Dr. + 10,000 Dr. – 8,000 Cr. = 4,000 ending balance.
- The 2,000 and 10,000 amounts are added because they are both debits. The 8,000
amount is deducted because it is a credit.
Take note:
- “Debit and debit” results to addition. Same is true for “credit and credit.”
- “Debit” and “credit,” or vice-versa, results to deduction.
Requirement: Using “T-account”, compute for the ending balance of your notes payable.
Solution:
Notes Payable
Dr. Cr.
1,200 Beg. Balance
Payments onloan 500 800 Additional loan
1,500 Ending balance
Acctg. Ed 1 - Financial Accounting & Reporting
Notes:
- The beginning balance is placed on the credit side because “Notes payable” is a
liability account and liabilities have normal credit balance.
- Additional loan increases the balance of notes payable; thus, it is placed on the credit
side.
- Payment of loan decreases the balance of notes payable; thus, it is placed on the
debit side.
- Then ending balance is the difference between the total credits and total debits in the
account. The ending balance is computed as follows: 1,200 Cr. + 800 Cr. – 500 Dr. =
1,500.
- The 1,200 and 800 amounts are added because they are both credits. The 500
amount is deducted because it is a debit.
Contra accounts are presented in the financial statements as deduction to their related
accounts.
Adjunct accounts are presented in the financial statements as addition to their related
accounts.
Thus:
- If an account has a normal debit balance, its contra account has a normal credit
balance (the opposite). To credit a normal debit balance means to deduct.
- If an account has a normal debit balance, its adjunct account has a normal debit
balance (the same). To debit a normal debit balance means to add.
A contra asset account has a normal credit balance, while an adjunct asset account has a
normal debit balance
The sum of the balances of an account and its related contra and adjunct account is called
the net carrying amount (or simply the “carrying amount”) of that account.
Example 1:
Your accounts receivable has a balance P100,000, while the related allowance for bad debts
account has a balance of P20,000. How much is the carrying amount of your accounts
receivable?
Solution:
The “Allowance for bad debts” is deducted because it is a contra account to “Accounts
receivable.”
Example 1:
You have a building with a historical cost of P1,000,000 and an accumulated depreciation of
P300,000. How much is the carrying amount of your building?
Solution:
Building P1,000,000
Accumulated depreciation - Building (300,000)
Building - net P700,000
Acctg. Ed 1 - Financial Accounting & Reporting
SAQ # 1
ASAQ # 1
Activity No. 1
The Books of Accounts
Instruction for numbers 1-6: Indicate the type of book of account that is most relevant to the
items described below.
Activity No. 2
Normal Balances of Accounts
Instruction for numbers 7-16: In COLUMN A, indicate whether the account is ASSET,
LIABILITY, EQUITY, INCOME or EXPENSE. If the account is a CONTRA or ADJUNCT
account, indicate that as well (e.g., CONTRA ASSET). In COLUMN B, indicate the normal
balance of the account, i.e., DEBIT or CREDIT.
Activity 3
Rules of Debits and Credits
Instruction for numbers 17-20: Indicate how each of the accounts listed below are increased
(i.e., DEBIT or CREDIT).
Activity No. 5
Identification (Books of Accounts)
Instruction: Indicate the type of book of account that is most relevant to the items described
below.
Activity No. 6
Identification (Types of Accounts)
Instruction:
- In COLUMN A, indicate whether the accounts is ASSET, LIABILITY, CAPITAL(EQUITY),
REVENUE(INCOME) or EXPENSE. If the account is a CONTRA or ADJUNCT account,
indicate that as well. (e.g., CONTRA ASSET).
- In COLUMN B, indicate the normal balance of the account, i.e., DEBIT or CREDIT
Activity No. 7
Identification (Types of Accounts)
Instruction: Indicate how the accounts listed below are increased, i.e., DEBIT or CREDIT
Reference:
Millan, Z.V. (2018). Financial Accounting & Reporting (Fundamentals) (2 nd ed.). Baguio City:
Bandolin Enterprise.