Module 4 - The Account and The Rules of Debit and Credit

COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting

First Semester | AY 2020-2021
Module 4
A. Course Code – Title : C-AE13: Financial Accounting and Reporting

B. Module No – Title : M04 – The Account and the Rules of Debit and Credit
C. Time Frame : 1 week (Week 4) – 6 hrs
D. Materials : Course Syllabus
1. Overview
This learning material provides a discussion of the account and the typical account
titles used. It also explains the double-entry system and the rules of debit and credit, as
well as the normal balances of accounts. Illustrative transactions and how their effects
are recorded in the T-accounts are also included.
You should read clearly and understand well the topics explained herein. Please
continue reading Ch. 2 of your textbook. It is also expected that you answer the assigned
problems and exercises.
2. Desired Learning Outcomes

At the end of the learning session, you should be able to:
a) Describe the account, T-account, and its main parts;
b) Explain the double-entry system and the rules of debit and credit;
c) Explain and determine the normal balances of accounts;
d) Record properly the effects of transactions in the T-accounts; and,
e) Prepare the trial balance.
3. Content/Discussion
Lesson 1 – The Account
The basic summary device used in accounting to record increases and
decreases in a particular asset, liability or owner’s equity item is the account. A separate
account is maintained for each element that appears in the statement of financial position
(assets, liabilities and equity) and in the income statement (income and expenses). Thus,
an account may be defined as a detailed record of the increases, decreases and balance of
each element that appears in an entity’s financial statements. The simplest form of the
account is the “T” account, so called because it is similar to the letter “T”. The account
has three parts:
Faculty: SISINIA T. QUIZON 1 | Page

Account Title
Debit side Credit side
The first part is the account title – this is the name of a particular asset, liability,
owner’s equity, income or expense item. Ex: Cash, Supplies, Taxes Payable, Rent Income,
Salaries Expense
The other two parts are the left side or debit side and the right side or the credit side.
It is on these sides where the increases and decreases in the account are recorded.
Lesson 2 – The Double-Entry System: Rules of Debit and Credit

Accounting is based on a double-entry system, which means that every transaction
has a two-fold effect on the accounting equation. Therefore, the dual effects of a business
transaction are recorded; that is, a debit side entry must always have a corresponding
credit side entry. As you have learned, for every value parted with, there is an equal
value parted with. The value received is the debit, and the value parted with is the credit.
Each transaction affects at least two accounts, although there may be more than two
effects. In every transaction, the total debits must always be equal to the total credits.
An account is debited when an amount is entered on the left side of the account, and it
is credited when an amount is entered on the right side. The account type determines
how increases or decreases in it are recorded.
The following are the rules of debit and credit.
Assets
Debit Credit
for for
increases decreases

Liabilities
Debit Credit
for for
decreases increases
Owner's Equity
Debit Credit
for for
decreases increases
(expenses, (investment,
drawings, losses) income, gains)
Observe: In the accounting equation, assets are on the left side; the left side of the account is the
debit side; liabilities and owner’s equity are on the right side of the equation; the right side of the
account is the credit side.
Using the same illustrative transactions in Module 2, let us learn how to record the transactions
in the T-accounts.
How are the entity’s transactions recorded in the T-accounts? First, we have to determine
what account titles will be needed in recording the transactions. We can do that by going over the
transactions to be recorded. In the real world of accounting, you have to refer to the chart of
accounts of the entity. This chart contains a list of all the accounts used by the business in
recording its transactions. The accounts are arranged in proper order; that is, from Cash down to
the last expense account.
In the problem, the account titles needed are: Cash, Accounts Receivable, Laundry
Supplies, Laundry Equipment, Accounts Payable, Abot, Capital; Abot, Drawing; Service Income,
Rent Expense, Utilities Expense, and Laundry Supplies Expense. We need 11 accounts, so we open
these accounts. How do we open these accounts? By drawing as many capital letter “Ts” as the
number of accounts needed. Then we write the account title above at the center of the letter T. It
is only after you have opened the accounts needed that you can record the transactions.

Ms. Dina Abot decided to open a laundry shop and had it registered as “Labango
Laundromat” on June 01, 2020. During the month various financial transactions occurred. The
effects of these transactions in terms of debit and credit are recorded in the T-accounts.
Jun 1 – Ms. Abot started her new business by investing P300,000 cash in Labango
Laundromat.
Cash
Jun 1 300,000
Abot, Capital
Jun 1 300,000
Jun 2 – Three washing machine units costing P90,000 were bought at Home Appliance
Center. The business paid P45,000 and promised to pay the balance in twenty days.
Cash
Jun 1 300,000 Jun 2 45, 000
Laundry Equipment
Jun 2 90,000
Accounts Payable
Jun 2 45,000

Jun 3 – Purchased laundry supplies, P10,000, for cash at WS Supermarket.
Laundry Supplies
Jun 3 10,000
Cash
Jun 1 300,000 Jun 2 45,000
3 10,000
Jun 6 – Received P15,000 cash for laundry services rendered to customers.
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000
Service Income
Jun 6 15,000
Jun 10- Rendered laundry services to a customer who promised to pay within five days,
P3,500.
Accounts Receivable
Jun 10 3,500

Service Income
Jun 6 15,000
10 3,500
Jun 15 – Received cash from the customer in the Jun 10 transaction because he paid his
account.
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000
15 3,500
Accounts Receivable
Jun 10 3,500 Jun 15 3,500
Jun 17 – Bought another washing machine on credit, P30,000, from Home Appliance
Center, and promised to pay within thirty days.
Laundry Equipment
Jun 2 90,000
17 30,000
Accounts Payable
Jun 2 45,000
17 30,000

Jun 20 – A customer paid P4,000 for laundry services rendered by the business.
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000
15 3,500
20 4,000
Service Income
Jun 6
15,000
10 3,500
20 4,000
Jun 22 – Paid its June 2 liability to Home Appliance Center.
Accounts Payable
Jun 22 45,000 Jun 2 45,000
17 30,000
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000
15 3,500 22 45,000
20 4,000

Jun 25 – A customer promised to pay after a week for laundry services rendered by the
business, P5,000.
Accounts Receivable
Jun 10 3,500 Jun 15 3,500
25 5,000
Service Income
Jun 6 15,000
10 3,500
20 4,000
25 5,000
Jun 28 – Paid water and electric bills for the month, P2,500.
Utilities Expense
Jun 28 2,500
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000
15 3,500 22 45,000
20 4,000 28 2,500
Jun 29 – Paid rent for the month, P3,000.
Rent Expense
Jun 29 3,000
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000

15 3,500 22 45,000
20 4,000 28 2,500
29 3,000
Jun 30 – The owner, Ms. Abot, withdrew P2,000 cash from the business for her personal
use.
Abot, Drawing
Jun 30 2,000
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000
15 3,500 22 45,000
20 4,000 28 2,500
29 3,000
30 2,000
Jun 30 – Of the laundry supplies bought, P4,000 was used in rendering laundry services
for the month.
Laundry Supplies Expense
Jun 30 4,000
Laundry Supplies
Jun 3 10,000 Jun 30 4,000
After all the transactions have been recorded in the T-accounts, the next step is to determine the
balance of each account. How is this done? First, add all the debits and the credits to each account;
then get the difference between the total debits and the total credits to each account. The
difference is the balance of the account, which at any one time may either be any of the following:
a) Debit balance – when the total debits to the account exceed its total credits
b) Credit balance – when the total credits to the account exceed its total debits
c) Zero balance – when the total debits and the total credits to the account are equal
Normal Balance of an Account – refers to the side of the account – debit or credit – where increases
are recorded. Asset, owner’s drawing and expense accounts normally have debit balances, because
increases in these accounts are debits. On the other hand, liability, the capital and income accounts
normally have credit balances, because increases in these accounts are credits.
Take a look at the following accounts where the above transactions were recorded and their
balances:
Cash
Jun 1 300,000 Jun 2 45,000
6 15,000 3 10,000
15 3,500 22 45,000
20 4,000 28 2,500
322,500 29 3,000
30 2,000
bal 215,000 107,500
Accounts Receivable
Jun 10 3,500 Jun 15 3,500
25 5,000
8,500
bal 5,000

AE13: Financial Accounting and Reporting
Laundry Supplies
Jun 3 10,000 Jun 30 4,000
bal 6,000
Laundry Equipment
Jun 2 90,000
17 30,000
bal 120,000
Accounts Payable
Jun 22 45,000 Jun 2 45,000
17 30,000
75,000
bal 30,000
Abot, Capital
Jun 1 300,000
bal 300,000
Abot, Drawing
Jun 30 2,000
bal 2,000

Service Income
Jun 6 15,000
10 3,500
20 4,000
25 5,000
27,500
bal 27,500
Utilities Expense
Jun 28 2,500
bal 2,500
Rent Expense
Jun 29 3,000
bal 3,000
Laundry Supplies Expense

Jun 30 4,000
bal 4,000
After you have determined the account balances, you have to prove the equality of the debits and
the credits by preparing a summary report called the Trial Balance. This financial report contains
a list of all the accounts together with their debit or credit balances. The order of presentation of
the accounts is as follows: Cash and other current assets, non-current assets, current liabilities,
non-current liabilities, capital, drawing, revenue, and expenses.

Following is the trial balance based on the computed account balances.
Labango Laundromat
Trial Balance
June 30, 2020
Account Titles Debit Credit

Cash P 215,000
Accounts Receivable 5,000
Laundry Supplies 6,000
Laundry Equipment 120,000
Accounts Payable P 30,000
Abot, Capital 300,000
Abot, Drawing 2,000
Service Income 27,500
Utilities Expense 2,500
Rent Expense 3,000
Laundry Supplies Expense __ 4,000 ___
Total P357,500 P357,500
Observe the following in preparing the trial balance:
1. The heading consists of three lines:

Name of the business
Title of the Report (Trial Balance)
Date
2. Account titles are arranged in the following order: Assets, Liabilities, Capital, Revenue and
Expenses
3. Note that even when an account has a zero balance, it may still appear in the trial balance. It may
be omitted, but the users may wonder what happened to the account.
4. The peso sign is placed on the first debit amount, the first credit amount and on the totals.
5. The totals are ruled (one horizontal line drawn under the last amounts of the debit and credit
columns, and double-ruled (two horizontal lines are drawn under the total amounts).

6. If the total debits do not equal the total credits, an error/s must have been committed, which
should be located first before ruling and double-ruling the totals. It is possible that any of the
following errors may have been committed:
a) Recording on the wrong side of the account (Cash debit recorded as Cash credit)
b) Recording a wrong amount (Cash debit of P400,000 posted as P40,000)
c) Debit or Credit footing or total of an account is not correct
d) The account balance/s copied from the accounts may not be correct.
Locating errors in the trial balance:

If the total debit amount does not tally to the total credit amount, the difference usually gives
a clue as to the kind of error committed:
1. A difference of ten would indicate probably an error in addition. Add the debit and credit
columns of the trial balance again. If the error is not there, go further and re-add the debit and
credit columns of the accounts.
2. If the difference is divisible by two, then the error probably is in recording on the wrong side. (a
debit to an account recorded on its credit side).
3. If the difference is divisible by 9 or a multiple of 9, the error is probably in transposition, that is,
the order of the digits of an amount are interchanged (an amount of P29,560 was copied as
P25,960), or an error in transplacement where the decimal point of the amount is misplaced
(P28,500 recorded or written as P285,000).
Even if the trial balance proves the equality of the debits and credits, it does not necessarily follow
that no error/s was/were committed. The following errors could have been made which the trial
balance would not be able to identify:
1. Failure to record a transaction

2. An erroneous or wrong amount is debited and credited for an entry
3. A transaction is recorded twice
4. An amount is recorded on the correct side but of the wrong account
Note: You must therefore exercise care in recording the transactions so as not to waste precious
time and effort when you have to go back to what you have done in order to locate the error.

From the trial balance, the financial statements can be prepared.
Labango Laundromat
Income Statement
For the month ended June 30, 2020
Service Income P 27,500

Less Operating Expenses:
Utilities Expense P 2,500
Laundry Supplies Expense 4,000
Rent Expense 3,000 9,500
Net Profit P 18,000
Labango Laundromat
Statement of Changes in Owner’s Equity
Abot, Capital, June 1, 2020 P300,000

Add Net Profit for the month 18,000
Total P318,000
Less Owner’s Drawing 2,000
Abot, Capital, June 30,2020 P316,000
Labango Laundromat
Statement of Financial Position
As of June 30, 2020
Assets
Cash P215,000
Accounts Receivable 5,000
Laundry Supplies 6,000
Laundry Equipment 120,000
Total Assets P 346,000

Liabilities and Owner’s Equity

Accounts Payable P 30,000
Abot, Capital 316,000
Total Liabilities and Owner’s Equity P 346,000
Labango Laundromat
Statement of Cash Flows
Cash received from customers (P27,500-5,000) P 22,500

Payments for:
Laundry Supplies P (10,000)
Utilities (Water & Electricity) ( 2,500)
Rent ( 3,000) (15,500)
Net cash provided by operating activities P 7,000
Cash Flows from Investing Activities:
Payments to acquire laundry equipment P(90,000)
Net cash used in investing activities (90,000)
Cash Flows from Financing Activities:
Cash investment of the owner P300,000
Cash withdrawal of the owner ( 2,000)
Net cash provided by financing activities 298,000
Net increase in cash during the month P215,000
Add Cash balance on June 1, 2020 0
Cash balance, June 30, 2020 P215,000
4. Progress Check
a) Discuss the account and its main parts.
b) Discuss the rules of debit and credit.
c) Cite the different groups of accounts and their normal balances.
d) Describe the trial balance and its purpose.

5. Assignment (Optional)
Answer end-of- Chapter 2 problems 18 & 19
6. Assessment
On May 1 of the current year, Mike Jordan established Luzon Bus Lines. The following
are the transactions for the month:
May 1 - The owner invested P10,000,000 cash in the business

2 - Secured business permit and paid taxes and licenses, P5,000.
4 - Purchased five second-hand buses, P5,000,000, by giving a 50% down payment,
and signing a promissory note for the balance
6 - Purchased for cash a computer set for use in the office, P35,000.
9 - Bought office supplies for cash, P15,000 .
12 - Acquired furniture and fixtures, P50,000, on credit from Home World.
13 - Paid for advertisements, P12,000.
14 - Passenger fares collected amounted to P235,000.
15 – Paid the salaries of drivers, conductors and clerk, P125,000.
18 - UA hired two buses for an educational trip to Bataan, P120,000. UA paid 50%
and promised to pay the balance in ten days.
20 – Paid for gas and oil of the buses, P30,000.
21 – Passenger fares for one week, P 180,000.
23 - Paid one-half of its liability to Home World.
25 - The owner P40,000 from the cash of the business for his personal use, not for the
business.
27 – UA paid in full its remaining balance of P60,000.
28 - Received and paid the electric and water bills for the month, P8,000.
29 – Paid for the rental of its terminal, P15,000.
30 – Paid the salaries of the clerk, drivers and conductors for the second half of the
month, P125,000.
31 – Passenger fares until the end of the month, P310,000.
Required:
a) Analyze the given transactions and record their effects in the T-accounts. Use the
following account titles: Cash; Accounts Receivable; Office Supplies; Furniture
and Fixtures; Office Equipment; Transportation Equipment; Accounts Payable;
Notes Payable; Jordan, Capital; Jordan, Drawing; Passenger Fares Income; Taxes

and Licenses; Advertising Expense; Salaries Expense; Gas and Oil Expense; Rent
Expense; Utilities Expense.
b) Determine the balances of all the accounts after the last transaction.
c) Prepare the Trial Balance as of May 31, 2020.
d) Try your best to prepare the financial statements.
e) Submit the requirements within 2 hours.
7. References
Manuel, Zenaida Vera-Cruz (2018) 21st Century Accounting Process, Basic Concepts and
Procedures, Manila, Philippines: Zenaida Vera-Cruz Manuel.
Ballada, Win. (2020) Basic Financial Accounting and Reporting, Cavite, Philippines:
Dom Dane Publishers & Made Easy Books.
Cabrera, Ma. Elenita B. & Cabrera, Gilbert Anthony B. (2018) Financial Accounting and
Reporting,Manila, Philippines: GIC Enterprises & Co., Inc.
Ferrer, Rodiel C. & Millan, Zeus Vernon B. (2017) Fundamentals of Accountancy,

Business and Management, Part 1, Baguio City, Philippines: Bandolin Enterprise.
Warren, Carl S., Reeve, James M., & Duchac, Jonathan E. ((2015) Accounting 25th
Edition, Pasig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).
Gilbertson, Claudia B., Lehman, Mark W., & Gentene, Debra H. (2017) Century 21
Accounting Multi-column Journal 10th Edition, Boston, MA 02210 USA: Cengage
Learning.
Wild, John; Kwok, Winston; Venkatesh, Sundar; Shaw, Ken W. & Chiappetta,
Barbara. (2016) Fundamental Accounting Principles 2nd Edition, 2 Penn Plaza, New York:
McGraw-Hill Education.

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COLLEGE OF ACCOUNTANCY

C-AE13: Financial Accounting and Reporting

A. Course Code – Title : C-AE13: Financial Accounting and Reporting

2. Desired Learning Outcomes

Faculty: SISINIA T. QUIZON 1 | Page

Debit side Credit side

Lesson 2 – The Double-Entry System: Rules of Debit and Credit

Faculty: SISINIA T. QUIZON 2 | Page

Faculty: SISINIA T. QUIZON 3 | Page

Faculty: SISINIA T. QUIZON 4 | Page

Jun 3 – Purchased laundry supplies, P10,000, for cash at WS Supermarket.

Jun 1 300,000 Jun 2 45,000

Jun 6 – Received P15,000 cash for laundry services rendered to customers.

Faculty: SISINIA T. QUIZON 5 | Page

Faculty: SISINIA T. QUIZON 6 | Page

Jun 22 – Paid its June 2 liability to Home Appliance Center.

Faculty: SISINIA T. QUIZON 7 | Page

Jun 29 – Paid rent for the month, P3,000.

Faculty: SISINIA T. QUIZON 8 | Page

Faculty: SISINIA T. QUIZON 10 | Page

Faculty: SISINIA T. QUIZON 11 | Page

Laundry Supplies Expense

Faculty: SISINIA T. QUIZON 12 | Page

Following is the trial balance based on the computed account balances.

Account Titles Debit Credit

Observe the following in preparing the trial balance:

1. The heading consists of three lines:

Faculty: SISINIA T. QUIZON 13 | Page

Locating errors in the trial balance:

1. Failure to record a transaction

Faculty: SISINIA T. QUIZON 14 | Page

From the trial balance, the financial statements can be prepared.

Service Income P 27,500

Abot, Capital, June 1, 2020 P300,000

Faculty: SISINIA T. QUIZON 15 | Page

Liabilities and Owner’s Equity

Cash received from customers (P27,500-5,000) P 22,500

Faculty: SISINIA T. QUIZON 16 | Page

May 1 - The owner invested P10,000,000 cash in the business

Faculty: SISINIA T. QUIZON 17 | Page

Ferrer, Rodiel C. & Millan, Zeus Vernon B. (2017) Fundamentals of Accountancy,

Faculty: SISINIA T. QUIZON 18 | Page

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