Books of Accounts and Double-entry System 1

The Books of Accounts

A business maintains two books of accounts, namely:
1. Journal; and
2. Ledger

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 process, thus providing an efficient way of recording and retrieving of
information.

Common examples of Special journals

a. Sales journal – is used to record sales on account.
b. Purchases journal – is used to record purchases of inventory on account.
c. Cash receipts journal – is used to record all transactions involving receipts of cash.
d. Cash disbursements journal – is used to record all transactions involving payments of cash.

A business may have other special journals to suit its needs. For example: “Purchase returns
journal,” “Sales returns journal,” etc.

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.

 This transaction involves sale on account; therefore, it is recorded in the sales journal.

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.

 This transaction cannot be recorded in the special journals; therefore, it is recorded in

the general journal.

Ledger
Books of Accounts and Double-entry System 2

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.”

Kind 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 group of accounts that comprise controlling account are shown in the subsidiary
ledger. Not all accounts in the general ledger though are controlling accounts. Only those
whose balances necessarily need a breakdown are considered controlling accounts.

Example:
You sell barbecue on credit. The balance of credit sales not yet collected is ₱100,000. This
information is shown in Accounts Receivable, which is a controlling account in the General
Ledger.
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. Analyze the
illustration below.

General Ledger Subsidiary Ledger

Accounts Receivable from

Customer A, P20,000.

Accounts Receivable, Accounts Receivable from

P100,000 Customer B, P30,000.

Accounts Receivable from

Customer C, P50,000.

Summary:
Books of Accounts Description Function
1. Journal  Book of original  Journalizing (Initial
a. General Journal entries Recording)
b. Special Journals
2. Ledger  Book of secondary  Posting
a. General Ledger entries (Classification)
b. Subsidiary Ledgers
Books of Accounts and Double-entry System 3

Formats of the Books of Accounts

General Journal
A general journal can have the following format:

Date column – indicates the Account titles Account numbers

recording dates of the
transactions. Transactions are
recorded in the journal
chronologically, meaning
arranged by dates.
column – the
accounts affected by a
business transaction
are recorded in this
column.
column – the
corresponding
numberings of the
accounts affected by the
transaction are listed here.

GENERAL JOURNAL
Date Account titles Acct. Debit Credit
#s.
8/3/16 Bad debts expenses 540 250 00
Allowance for bad debts 125 250 00
To record the bad debts
expense for the period.

8/4/16 Computer equipment

Debit & Credit columns – Centavos are placed

the monetary effects of here.
the transaction to the
accounts are recorded
here.

Other columns may be included, like “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 journal entries.

Special Journal
A special journal can have the following format:
Books of Accounts and Double-entry System 4

CASH RECEIPTS JOURNAL

Accounts Sales Sundry Credits Cash Debit
receivable Credit
Credit
Date Description Account title Amount

Accounts that are normally
credited when cash collection is
recorded are separately
indicated here. This eliminates
the need to record these
accounts repeatedly each time a
collection is made.
Accounts affected by a
transaction other than
“accounts receivable” and
“sales” are recorded here.
“Sundry” means
miscellaneous or various.
The amount of credit The amount of cash
to a “sundry” collection (debit to
account is recorded cash) is recorded
here. here.

General Ledger & Subsidiary Ledgers

SUBSIDIARY LEDGERS GENERAL LEDGER

Customer A ACCOUNTS RECEIVABLE No. 120
Date Ref. Debit Credit Balance Date Ref. Debit Credit Balance
Balance forwarded 1,000.00 Balance forwarded 40,000.00
July 2, 20x1 4,000.00 5,000.00 July 2, 20x1 6,000.00 46,000.00

Customer B
Date Ref. Debit Credit Balance
Balance forwarded
July 2, 20x1 2,000.00 2,000.00

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 the accounting equation
does not balance, there is an error.
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.

Concepts of Duality and Equilibrium

The double-entry system involves the use of the concepts of “duality” and “equilibrium.”
a. The concept of duality views each transaction as having a two-fold effect on values – a value
received and a value parted with, and each transaction is recorded using at least two accounts.
b. The concept of equilibrium requires that each transaction is recorded in terms of equal
debits and credits. For every peso debited, there is a corresponding peso credited and vice
versa.

Normal balances of account

The normal balance of an account is on the side where an increase in that account is recorded.
The following are the normal balances of accounts:
Books of Accounts and Double-entry System 5

Type of Account Normal balance

Asset Debit
Liability Credit
Equity Credit
Income Credit
Expense Debit

To help us remember the normal balances of accounts, let us recall the expanded basic
accounting equation:

Assets = Liabilities + Equity + Income - Expenses

Notes:
 “Assets” which is on the left side of the equation has a normal debit balance.
 “Liabilities,” “Equity,” and “Income” which are additions on the right side of the
equation have normal credit balances.
 “Expenses” which is a deduction on the right side of the equation has a normal debit
balance.
 Income increases equity thus it has a normal credit balance (same with equity). 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 + Equity + Income

Friendly advice: We encourage you to memorize the normal balances of the accounts as this
will make your study of accounting much easier.

Rules of Debits and Credits

To debit an account with a normal debit balance means to increase that account. To credit it
means to decrease it.
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.

Type of account Normal balance Debit Credit

Asset Debit Increase Decrease
Liability Credit Decrease Increase
Equity Credit Decrease Increase
Income Credit Decrease Increase
Expense Debit Increase Decrease

Recall the following concepts:

 An account takes the form of a “T-account” which resembles the alphabetical letter
“T”.
 The left side of all accounts is the debit side while the right side of all accounts is the
credit side.
 The normal balance of an account is the side where that account is increased.

The previous concepts are integrated in the following illustration:

Books of Accounts and Double-entry System 6

Balance Sheet Accounts:

ASSET ACCOUNTS LIABILITY ACCOUNTS

Debit for Credit for Debit for Credit for
increases (+) decreases (-) decreases (+) increases (-)
EQUITY ACCOUNTS
Debit for Credit for
decreases (+) increases (-)

Income Statement Accounts:

EXPENSE ACCOUNTS INCOME ACCOUNTS

Debit for Credit for Debit for Credit for
increases (+) decreases (-) decreases (+) increases (-)

Ending balance of an account

Debits to a specific asset or expense account should be greater than (or equal to) the credits to
that account. On the other hand, credits to a liability, equity or income account should be
greater than (or equal to) the debits to that account.
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, then the account is said to have
an 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, equity or income
account results to an ending balance that is a debit. Analyze the T-accounts below:

ASSET ACCOUNT
Debit Credit
100 20
Ending Balance
(100 Dr. – 20 Cr.) NORMAL * 80

*The ending balance of P80 is a “normal balance” because the total debit is greater than the
total credit (i.e., 100>20).

ASSET ACCOUNT
Debit Credit
100 100
Ending Balance
(100 Dr. – 100 Cr.) NORMAL * 0

*The asset account has a zero balance. This is the minimum balance an asset account can have.
A zero balance occurs when total debits equals total credits.
Books of Accounts and Double-entry System 7

ASSET ACCOUNT
Debit Credit
100 120
Ending Balance
20 (100 Dr. – 120 Cr.) ABNORMAL *

*The ending balance of the asset account is an “abnormal balance” because the total debits
are less than the total debits.

LIABILITY ACCOUNT
Debit Credit
100 70
Ending Balance
(70 Cr. – 100 Dr.) ABNORMAL * 30

*The ending balance of the liability account is an “abnormal balance” because the total
credits are less than the total debits.

Illustration: Rules of debits and credits

Case #1: Asset account

At the beginning of the period, you have a cash balance of P2,000. During the period, you had
total cash collections amounting to P10,000 and made total cash payments of P8,000.

Requirement: Using “T-account” analysis, compute for the ending balance of your cash.

Solution:

Cash
Dr. Cr.
Beginning 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 debits 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.

Remember the following:

 “Debit and debit” results to addition. Same is true for “credit and credit.”
 “Debit” and “credit,” or vice-versa, results to deduction.
Books of Accounts and Double-entry System 8

Case #2: Liability account

At the beginning of the period, you have a note payable of P1,200. During the period, you
obtained an additional loan amounting to P800 and made total payments of P500.

Requirement: Using “T-account” analysis, compute for the ending balance of the notes
payable.

Solution:
Notes payable
Dr. Cr.
1,200 Beginning balance

Payments on the loan 500 800 Additional loan

1,500 Ending balance

Notes:
 The beginning balance is placed on the credit side because “Notes payable” is a
liability account and liabilities have a normal credit balance.
 Additional loan increases the balance of note payable; thus, it is placed in the credit
side.
 Payment of loan decreases the balance of note payable; thus, it is placed on the debit
side.
 The 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 and Adjunct accounts

Some accounts have related accounts to them. An account related to another account is referred
to as either a contra account or an adjunct account.

 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.

On the other hand,

 If an account has a normal credit balance, its contra account has a normal debit balance
(the opposite). To debit a normal credit balance means to deduct.
Books of Accounts and Double-entry System 9

 If an account has a normal credit balance, its adjunct account has a normal credit
balance (the same). To credit a normal credit balance means to add.

A contra asset account has a normal credit balance while an adjunct asset account has a
normal debit balance.

Examples of accounts with contra accounts:

ACCOUNT RELATED ACCOUNT
 Accounts receivable  Allowance for bad debts
 Type of account: CONTRA ACCOUNT
 Building  Accumulated depreciation – Building
 Type of account: CONTRA ACCOUNT
 Equipment  Accumulated depreciation – Equipment
 Type of account: CONTRA ACCOUNT

The sum of the balances of an account and its related contra or adjunct account is called the net
carrying amount (or simply the ‘carrying amount’) of that account.

Example 1:
Your accounts receivable has a balance of 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:

Accounts receivable P100,000

Allowance for bad debts (20,000)
Accounts receivable - net P80,000

Notice that the “Allowance for bad debts” is deducted because it is a contra account to
“Accounts receivable.”

Example 2:
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

Source: Fundamentals of Accountancy, Business and Management by Zeus Vernon B. Millan