Fundamentals of Accounting, Business, and

Management

Chapter 7

Books of Accounts and

Double-entry System

Fundamentals of Accounting, Business and Management | ABM S1

Chapter 7
Books of Accounts and Double-entry System
Introduction

An accounting journal, also called the book of first entry, is a record of business
transactions and events for a specific account. In other words, a journal chronologically stores
all the journal entries for a specific account or group of account in one place, so management
and bookkeepers can analyzed the data.

Accounting journals are often called the book of first entry because this is where journal
entries is made. Once a business transaction is made, the bookkeeper records that event in the
form of a journal entry in one of the accounting journals. Then, at the end of the period, the
journals are posted to accounting ledgers for reporting purposes.

Specific Objectives

At the end of the lesson, the students should be able to:

1. Identify the uses of the two books of accounts.
2. Illustrate the format of general and special journals.
3. Illustrate the format of general and subsidiary ledger.

Duration

Chapter 7: Books of Accounts and Double-entry System [3 Hours]

7.1The Books of Account

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 recorded in the journal through journal entries. This recording process
is called journalizing.

TYPES OF JOURNALS

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 information.

Common examples of Special Journals

Fundamentals of Accounting, Business and Management | ABM S1

 a. Sales journal – is used to record sales on account.
b. Purchase 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
payment of cash.

2. General journal – all other transactions that cannot be recorded in the special journals
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
receipt journal.
c. You sold barbecue to a customer who promised in writing to pay the sale price next
week.
➢ This transactions cannot be recorded in the special journals; therefore, it is
recorded in the general journal.

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 called the “book of secondary entries” or the “books of final entries”.

KINDS OF LEDGERS

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 accounts is shown in the general ledger while
the balances of the accounts that comprises the controlling account are shown in the subsidiary
ledger.

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.

Fundamentals of Accounting, Business and Management | ABM S1

 General Ledger Subsidiary Ledgers

Accounts Receivable from

Customer A, ₱20,000

Accounts Receivable from

Accounts Receivable, ₱100,000
Customer B, ₱30,000.

Accounts Receivable from

Customer C, ₱50,000.

FORMATS OF THE BOOKS OF ACCOUNTS

General Journal

A general journal can have the following format:

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

GENERAL JOURNAL
Date Account Titles Account
2016 Number Debit Credit
August 3 Bad debts expense 540 250 00
Allowance for bad debts 125 250 00
to record the bad debts expense
for the period

4 Accounts receivable 120 500

Sales 410 500

Debit & Credit columns – the Centavos are placed here.

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

Fundamentals of Accounting, Business and Management | ABM S1

Special Journal

In addition to the general journal, there are several special journals or subsidiary
journals that are used to help divide and organize business transactions

TYPES OF SPECIAL JOURNAL

1. Sales Journal
A sales journal is used to record sales transactions. This type of journal is used to
accumulate information about sales on account. For example, if a company sells a product for
₱10,000.00 on account, it will be recorded in the sales journal.

2. Purchases Journal
A purchases journal is used to record purchases of merchandise/inventory. When a
purchase on account is made, it is recorded in this journal.

3. Cash Receipts Journal

A cash receipts journal is used to record cash receipts. Such receipts may include cash
from sales of merchandise, collection of balances due from customers and so on.

4. Cash Disbursement Journal

A cash disbursements journal is used to record cash payments. When a company pays for
merchandised purchased on account, for supplies, etc., such as payments are recorded in the
cash disbursements journal.

7.2 Double-entry system

Accounting is based on a double-entry system which means that the dual effects of a
business transaction is recorded. A debit side entry must have a corresponding credit side entry.
For every transaction, there must be one or more accounts debited and one or more accounts
credited. Each transaction affects at least two accounts. The total debits for a transaction must
always equal the total credits.

An account is debited when amount is entered on the left side of the account and
credited when an amount is entered on the right side. The abbreviations for debit and credit are
Dr. (from the Latin debere) and Cr. (from the latin credere), respectively.

Normal balances of accounts

The normal balance of any account refers to the side of the account-debit or credit-where
increases are recorded. Assets, owner’s withdrawals and expense accounts normally have debit
balances, liability, owner’s equity and income accounts normally have credit balances. This
result occurs because increase in an account are usually greater than or equal to decreases.

Fundamentals of Accounting, Business and Management | ABM S1

 Increase Normal
Account
Recorded by Balance
Category
Debit Credit Debit Credit
Assets ✔ ✔
Liabilities ✔ ✔
Owner’s Equity:
Owner’s Capital ✔ ✔
Withdrawals ✔ ✔
Income ✔ ✔
Expenses ✔ ✔

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 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

These are the rules of debit and credit. The following summarize the rules:

Balance Sheet Accounts

Assets Liabilities and Owner’s Equity
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

Income Statement Accounts

Debit for decreases in owner’s equity Credit for increases in owner’s equity
Expenses Income
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

Illustration: Rules of debits and credits

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Case # 1: Asset Account
At the beginning of the period, you have a cash balance of ₱2.000. During the period, you had
total cash collections amounting to ₱10,000 and made total cash payments of ₱8,000.

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

Case # 2: Liability account

At the beginning of the period, you have a note payable of ₱1,200. During the period,
you obtained an additional loan amounting to ₱800 and made total payments of ₱500.

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

Solution:

Notes payable
Dr. Cr.
1,200 Beginning balance

Payments on the
loan 500 800 Additional loan
1,500 Ending balance

Contra and Adjunct Accounts

➢ 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
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 credit balance, its contra account has a normal debit balance (the
opposite). To debit a normal credit balance means to deduct.

Fundamentals of Accounting, Business and Management | ABM S1

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

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

Example 1:
Your accounts receivable has a balance of ₱100,000 while the related allowance for bad debts
accounts has a balance of ₱20,000. How much is the carrying amount of your account
receivable?

Solution:
Accounts receivable ₱100,000
Allowance for bad debts (20,000)
Accounts receivable – net ₱80,000

Example 2:
You have a building with a historical cost of ₱1,000,000 and an accumulated depreciation of
₱300,000. How much is the carrying amount of your building?

Solution:
Building ₱1,000,000
Accumulated depreciation – Building (300,000)
Building – net ₱700,000

Fundamentals of Accounting, Business and Management | ABM S1

Activity Sheet
FUNDAMENTALS OF ACCOUNTING, BUSINESS AND MANAGEMENT
ACTIVITY
NAME: SCORE:
COURSE/YEAR/SECTION: DATE:

I.REVIEW QUESTIONS:

1. What are the two books of accounts? Describe each briefly.

2. What are the four commonly used special journals? Identify the transactions recorded
in each type of special journal.
3. What are the normal balances of five majors accounts? Explain how each of these major
accounts is increased or decreased.
4. What is the double-entry system of recording?
5. What is the difference between a contra account and an adjunct account?

II.IDENTIFICATION
Instructions:
➢ In COLUMN A, indicate whether the account is ASSET, LIABILITY, EQUITY,
INCOME or EXPENSES.
➢ In COLUMN B, indicate the normal balance of the account, i.e., DEBIT or CREDIT
ACCOUNTS COLUMN A COLUMN B
1. Notes receivable
2. Salaries expense
3. Salaries payable
4. Owner’s drawings
5. Building
6. Cost of sales
7. Service fees
8. Accounts payable
9. Prepaid insurance
10. Depreciation

Fundamentals of Accounting, Business and Management | ABM S1