CHAPTER 3: RECORDING OF THE BUSINESS

TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022

Step 2: Transactions are Recorded in

STEP 1: TRANSACTION ANALYSIS
4 Basic Steps for Transaction Analysis
1. Identify the transaction from source
documents.
2. Indicate the accounts—assets,
liabilities, equity, income
expenses—affected by the
transaction.
3. Ascertain whether each account is
increased or decreased by the
transactions.
4. Using the rules of debit and credit,
determine whether to debit and credit
the account to record its increase and
decrease.
SOURCE DOCUMENTS
This identifies and describes
transactions and events entering the
accounting process. This written evidence
contains about the nature and the
amounts of transactions.
Some of the common source
documents are: sales invoices, cash
register tapes, official receipts, bank
register slips, bank statements, checks,
purchase orders, timecards and
statements of account.
ACCOUNTING CYCLE: SEQUENTIAL
STEPS AND AIMS
During the Accounting Period
Step 1: Identification of Events to be
Recorded
- To gather information about the
transactions or events generally
through the source documents.
the Journal
- To record the economic impact of
the transactions on the firm in a
journal, which is a form that
facilitates transfer to the account.
Step 3: Journal Entries are Posted in
or the Ledgers
- To transfer the information from the
journal to the ledger for
classification.
At the end of the Accounting Period
Step 4: Preparation of Trial Balance
- To provide listings to verify the
equality of debits and credits in the
ledger.
Step 5: Preparation of the Worksheet
including the Adjusting Entries
- To aid in preparation of financial
statements.
Step 6: Preparation of the Financial
Statements
- To provide useful information to the
decision-makers.
Step 7: Adjusting Journal Entries are
Journalized and Posted
- To record accruals, expiration of
deferrals, estimation and other
events from the worksheets.
Step 8: Closing Journal Entries are
Journalized and Posted
- To close temporary accounts and
transfer profit to owner’s equity.
Step 9: Preparation of Post-Closing
Trial Balance
- To check the equality of debits and
credits after the closing entries.

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CHAPTER 3: RECORDING OF THE BUSINESS
TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022
At the end of the Accounting Period
Step 10: Reversing Journal Entries
are Journalized and Posted
- To simplify the recording of certain
regular transactions in the next
accounting period.
STEP 1: THE GENERAL JOURNAL
➔Shows all the effects of the
transaction in terms of debits and
credits.
STEP 2: POSTING
➔Transferring the amounts from the
general journal to appropriate
accounts in the ledger.
STEP 3: THE LEDGER
➔Group of accounts. Used to classify
and summarize transactions and to
prepare data for basic financial
statements.
STEP 4: TRIAL BALANCE
➔Listing all ledger accounts, in order,
with their respective debit or credit
balances.
THE JOURNAL
➔Chronological record of entity’s
transactions.
➔“book of original entry”
➔Shows all the effects of a business
transaction in terms of debit &
credit.
➔The general journal is the simplest
journal.
Standard Format of General Journal
1. Date - year and month are not
written every entry unless the year
or month changes or new page is
needed.
2. Account Titles and Explanation -
the account to be debited are
written on the extreme left of the
first line while 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 the line after each
entry.
3. P.R. (posting reference) - is used
when the entries are posted, that is,
until the amounts are transferred to
the related ledger accounts.
4. Debit - the debit amount for each
account is posted in this column.
5. Credit - the credit amount for each
account is posted in this column.
Simple and Compound Entry
1. Simple Entry - only two accounts
are affected.
2. Compound Entry - three or more
accounts are required.
STEP 2: TRANSACTIONS ARE
JOURNALIZED
Journalizing is the process of
recording a transaction. To understand the
nature of the affected accounts, the letter
A, L or OE is inserted after each entry. OE
is can be classified into OE:I and OE:E
Rules of Double-Entry System
1. Two or more accounts are affected by
each transaction.
2. The sum of the debits equals the sum
of the credits.
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CHAPTER 3: RECORDING OF THE BUSINESS
TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022
3. Equality of accounting equations is
always maintained.
THE LEDGER
Ledger is the grouping of the entity’s
account. A general ledger is the
“reference book” of an accounting system
and is used to classify and summarize
transactions, and to prepare data for basic
financial statements.
Classification of Accounts in General
Ledger
1. Balance Sheet or permanent
accounts (assets, liabilities, equity)
2. Income statement or
temporary/nominal accounts
(income and expenses). At the end
of the period these are transferred
to the permanent owner’s equity
account.
CHART OF ACCOUNTS
Chart of accounts is a listing of all the
accounts and their account number in the
ledger. The chart is arranged in financial
statement order (1: assets; 2: liabilities; 3:
owner’s equity; 4: income; 5: expenses).
The account should be numbered in a
flexible manner to permit indexing and
cross-referencing.
The accountants should refer to the
chart of accounts in analyzing transactions
to identify the applicable account to be
increased or decreased.
STEP 3: POSTING
Posting means transferring the
amounts from the journal to the
appropriate accounts in the ledger.
4 Basic Steps for Posting
1. Transfer the date of transaction from
the journal to the ledger.
2. Transfer the page number from the
journal to the journal reference (J.R.)
column of the ledger.
3. Post the debit figure from the journal
as the debit figure in the ledger and
credit figure from the journal to the
credit figure in the ledger.
4. Enter the account number in the
posting reference column of the
journal once the figure has been
posted to the ledger.
LEDGER ACCOUNTS AFTER
POSTING
At the end of an accounting period,
the debit or credit balance of each account
must be determined to enable us to come
up with a trial balance.
❖Each account balance must be
determined by footing (adding) all
the debits and credits.
❖If the sum of an account’s debits is
greater than the sum of the
account’s credit, that account has a
debit balance.
❖If the sum of credits is greater that
account has a credit balance.
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CHAPTER 3: RECORDING OF THE BUSINESS
TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022

3. Error in preparing trial balance

STEP 4: TRIAL BALANCE - one of the columns of trial
Trial balance is a list of all accounts balance was incorrectly added.
with their respective debits or credits - the amount of an account
balances. Prepared to verify the equality of balance was incorrectly
debits and credits in the ledger. recorded in trial balance.
Trial balance minimizes accounting - a debit balance was recorded
errors. When the totals are equal, the trial on the trial balance as a credit
balance is in balance. This provides or vice versa, or a balance was
accuracy but does not signify absence of omitted entirely.
errors.

Procedure in the Preparation of Trial

Balance
1. List the account titles in numerical
order.
2. Obtain the account balances of each
account from the ledger and enter the
debit balances to the debit column
and credit balances to credit column.
3. Add the debit and credit columns.
4. Compare the totals.

LOCATING ERRORS
Errors When There is an Inequality of
Totals
1. Error in posting a transaction to
the ledger.
- an erroneous amount was
posted to the account.
- a debit entry was posted as
credit and vice versa.
- a debit or credit posting was
omitted.
2. Error in determining the account
balances
- a balance was incorrectly
computed
- a balance is entered in the
wrong balance column.