CHAPTER 4

ACCOUNTING CYCLE FOR A SERVICE COMPANY

Learning Objectives:

At the end of this chapter, each student should be able to:

1. Enumerate the steps in the accounting cycle.

2. Explain the first four steps in the accounting cycle.
3. Record transactions in the journal.
4. Post journal entries to the ledger.
5. Compute the balances of the accounts in the ledger.
6. Prepare a trial balance.

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7. Explain the significance of the trial balance.
8. Prepare correcting entries.

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Accounting cycle is a sequence of operations used to account business transactions during
a specific period.

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There are eleven steps in the accounting cycle. They are as follows:
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1. Analysis of transactions.
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2. Recording of transactions in the journal.
3. Posting of journal entries to the ledger.
4. Preparation of trial balance.
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5. Compilation of data needed to adjust the accounts.

6. Preparation of a work sheet.
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7. Preparation of financial statements.

8. Journalizing and posting of adjusting entries.
9. Journalizing and posting of closing entries.
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10. Preparation of post-closing trial balance.

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11. Journalizing and posting of reversing entries.

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Only the first four steps will be discussed in this chapter. The rest will be discussed in the
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next chapters.

Analysis of Transactions

In actual practice, transactions are evidenced by business documents such as sales invoices,
official receipts, cash vouchers, bank deposit slips, etc. Based on these documents,
transactions are analyzed using the rules of the debit and credit.

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The Journal

A journal is an accounting book wherein business transactions are recorded for the first
time. It is called the book of original entry. There are different kinds of journal. They are:
the purchases journal, sales journal, cash receipts journal, cash payments journal, and the
general journal.The number of journals to be used depends on the size and needs of the
business. A journal may contain only one money column or two or more money columns. The
number of money columns in any journal is dependent upon the information to be recorded
therein. Journals may be loose-leaf or book bound. The simplest form of journal has only two
money columns and may be used for recording all transactions in chronological order. It is
called the general journal (see sample below).

GENERAL JOURNAL

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Page 5

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Date Post
2019 Description Ref. Debit Credit
Mar 5 Cash 1 0 0 0 -

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Sales 1 0 0 0 -

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Cash sales for the day. T
11 Advertising Expense 5 0 0 -
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Cash 5 0 0 -
Advertisement in
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newspaper.
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Journalizing
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CP

The process of recording transactions in a journal is called journalizing.

The procedures followed in journalizing are as follows:

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1. Date of entry
a. Write the year in small figures at the top of the column. The year is written
only once in a journal page (unless the year changes).
b. Write the month below the year on the first line. A month is generally written
only once in a page. When the month changes, the new month should be
written. The name of the month may be abbreviated.
c. Write the day of the month in the right sub-column of the date column. It is
repeated for every transaction occurring on the same day.

2. Debit part of the entry

a. Write the account title of each debit item at the extreme left edge of the
Description column.

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 b. Write the amount of each debit item in the Debit column.
3. Credit part of the entry
a. Write the account title of each credit item in the Description column. Indent
each account title, about one-half of an inch, from the left edge column.
Indenting this item helps to separate the credit part of the entry from the debit
part.
b. Write the amount of each credit item in the Credit column.

4. Reason for the entry

a. Write a brief explanation or indicate the source document in the Description
column immediately below the last credit item. Indent about one inch from the
left edge of the column.
b. If the explanation takes more than one line, the next line should be indented

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about one-half inch from the left edge of the column.

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5. A space is left blank between each entry in order to clearly separate all entries.

6. The Folio or Post. Ref. (Posting Reference) column is used to indicate the account

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number in the ledger to which the entry is transferred. This will be explained further

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under the topic Posting. T
The Journal Entry
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The record of the transaction or event is called the journal entry. Literally, it is the entry
of a transaction or event in the journal. In the double-entry method, each journal entry is
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composed of two parts, namely, the debit and the credit.

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The two types of journal entries are:

1. Simple entry which contains one debit and one credit.

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2. Compound entry which contains

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a. One debit and two credits.

b. Two or more debits and one credit.
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c. Two or more debits and two or more credits.

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Whether a simple entry or compound entry is to be used, it is optional on the part of the
recorder. Compounding an entry, however, is not to be used to serve laziness at the sacrifice
of clarity. Compound entries should be used only for similar transactions. For example, cash
sales may be compounded, but an expense cannot be compounded with sales.

Advantages of the Journal

1. A complete record of transactions is provided in one place. The provision for a posting
reference column, which contains the account number in the ledger where the same
information is recorded, facilitates the re-establishment and checking of any given
transaction.

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 2. A chronological order of transactions and events is provided in one book.

3. The explanation given to each journal entry permits the omission of repetitive
explanation in the ledger.

4. The use of journal affords an easy check on the proper implementation of the rules of
debit and credit.

5. The journal facilitates the discovery of errors. This is in combination with the ledger.
In as much as the two records contain the same information, a doubt on one may be
resolved by referring to the other.

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Common Accounting Practices

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In recording business transactions using the journals, the ledger, and other forms with ruled
money columns, written manually or otherwise, it is important to remember the following
common accounting practices:

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1. Words are written in full when space is adequate. Abbreviations may be used when
space is inadequate.
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2. Peso signs, centavo signs, commas and decimal points are not used when amounts are
written in ruled columns of accounting forms.
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3. Two zeros are written in the centavo column when the amount is in even pesos. If the
centavo column were left blank, there might be some doubt later that the recording of
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the centavos was overlooked. Some accountants use a dash (-) instead of two zeros for
indicating no centavos.
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4. When the accountant draws a single line beneath an amount, this single line indicates
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that either a total or a remainder follows.

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5. A double ruling across an amount column indicates that the work above the double
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lines is complete and accurate.

6. For neat accounting work, a ruler or any straight-edge material is needed for drawing
single and double rulings.

7. If an error is made in writing an amount or word in an entry, the incorrect amount or

word is cancelled by drawing a line through it. The correct amount or word is then
written immediately above the cancelled amount or word.

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The Ledger

Since transactions are recorded in the journal according to their dates of occurrence, items
of similar nature are not grouped together. Information in the general journal is spread among
the various transactions recorded. If information regarding an item is desired, say cash, for
example, it is still necessary to gather the information from the scattered pages of the journal.
Due to this inconvenience, there is a need for another record in which the data appearing in the
journal may be summarized to show the status of each item. Each item is represented by an
account. Group of related accounts is called a ledger. The separate accounts in the ledger
may be on ledger cards, ledger sheets, or bound in book form.

Two-column Account – (Used under manual accounting system.)

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Shown below is the standard two-column form of account. Both sides of the account are

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identical except that the left side is used for debits and the right side is used for credits. The
column on each side provides for (1) the date; (2) brief explanation, if it is desired, (3) the page
reference to the journal in which the transaction was recorded, and (4) the amount.

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Account: Cash Acct. No. 11
Date Post Date Post
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2019 Items Ref. Debit 2019 Items Ref. Credit
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May 2 J-1 5 0 0 0 - May 3 J-1 1 0 0 0 -
8 J-1 1 0 0 0 - 9 J-1 2 0 0 -
15 J-2 5 0 0 - 14 J-2 4 5 -
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14 J-2 1 0 0 -
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Three-column Account – (Used under the computer-based system.)

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Account: Cash Acct. No. 11

Date Post
2019 Items Ref. Debit Credit Balance
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May 2 J-1 5 0 0 0 - 5 0 0 0 -
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3 J-1 1 0 0 0 - 4 0 0 0 -
8 J-1 1 0 0 0 - 5 0 0 0 -
9 J-1 2 0 0 - 4 8 0 0 -
14 J-2 4 5 - 4 7 5 5 -
14 J-2 1 0 0 - 4 6 5 5 -
15 J-2 5 0 0 - 5 1 5 5 -

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 All entries in the journal are ultimately recorded in the ledger. For this reason the ledger
is oftentimes called the book of final entry.

Relationship Between the Journal and the Ledger

1. Information recorded in the ledger always comes from the journal.

2. Information in the journal is grouped according to transactions while in the ledger, by

accounts.

3. The journal is a book of original entry while the ledger is a book of final entry.

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4. The two records are cross-referenced to each other by the use of the posting reference
columns.

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Posting (to a 3-column account)

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The process of transferring to the ledger the same information recorded in the journal is called

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posting. Debit entries in the journal are transferred to the debit column of the pertinent account
in the ledger and the credit entries are transferred to the credit column of the proper account in
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the ledger. While there is no fixed rule of procedure in posting, it is well to bear in mind that
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to minimize error, any procedure selected should be followed consistently. The following
procedure is suggested.
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1. Locate the corresponding account in the ledger.

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2. Transfer the entry from the journal to the ledger as follows:

a. Date (recording of dates is similar to that employed in the journal).
b. Explanation (optional).
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c. Amount
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3. Get the balance after each entry. Apply the rules of debits and credits and the normal
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balance of each account.

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3. Place the page of the journal where the information transferred is located in the posting
reference column of the ledger account.

4. Place in the posting reference column of the journal the number of the account in the
ledger to which the posting is made.

The above procedure should be followed for debits as well as for credits. It is preferable
to post the debit before the credit. A consistent implementation of the above procedure should
indicate that when the posting reference column of the journal is filled, the posting of such
item has been completed.

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 POSTING ILLUSTRATED

Transaction: On May 2, 2019, Rose Ann invested P500,000 cash in a trucking business.

GENERAL JOURNAL

Page 1
Date Post
2019 Description Ref. Debit Credit
May 2 Cash 11
500,000.00

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Rose Ann, Capital 31 500,000.00
To record initial investment.

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3
1

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1 2c
2b
4
2b
bb 4 3
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GENERAL LEDGER
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Account: Cash Acct. No. 11

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Date Post
2a 2019 Items Ref. Debit Credit Balance
May 2 Initial investment. J-1 500,000.00 500,000.00
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CP

2c
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Account: Rose Ann, Capital Acct. No. 31

2a Date Post
2019 Items Ref. Debit Credit Balance
May 2 Initial investment J-1 500,000.00 500,000.00

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Chart of Accounts

In recording business transactions and events, the bookkeeper is usually guided by a chart
of accounts. A chart of accounts is a list of account titles classified or arranged according to
the financial statements wherein they appear. They agree with the order of the items in the
statement of financial position and income statement.

The number of accounts maintained for a particular business depends upon the nature of
its operations, the volume of transactions, and the extent to which details are desired.

Accounts in the chart of accounts are numbered to permit indexing and also for use as
posting references.

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Below and continued on the next page is an example of a chart of accounts. All numbers
have two digits. The first digit indicates the major division of the ledger in which the account

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is placed. Accounts beginning with 1 represent assets, 2, liabilities, 3, owner’s equity, 4,
revenues and 5, expenses. The second digit indicates the position of the account within its
division.

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CHART OF ACCOUNTS T
STATEMENT OF FINANCIAL POSITION ACCOUNTS
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1. ASSETS
Account
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Number Account
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11 Cash
12 Accounts Receivable
13 Sewing Supplies
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14 Prepaid Rent
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16 Sewing Machine
16-A Accumulated Depreciation-
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Sewing Machine
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2. LIABILITIES

21 Accounts Payable
22 Wages Payable
23 Unearned Revenue

3. OWNER’S EQUITY

31 Faye, Capital
32 Faye, Drawing
33 Income Summary

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 INCOME STATEMENT ACCOUNTS

4. REVENUE

41 Service Fee

5. EXPENSES

51 Wages Expense
52 Sewing Supplies Expense
53 Rent Expense
54 Depreciation Expense-Sewing Machine
55 Utilities Expense

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ILLUSTRATIVE PROBLEM

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On July 1, 2019, after gaining enough experience in dressmaking, Faye, with three (3)
sewers to assist her, opened the D’ Fashionista. Transactions during the month will be used

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to illustrate the topics just discussed.

Applying the steps in the recording process –

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T
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1. Analysis of transactions

July 1 Faye invested cash of P30,000 and four (4) brand new sewing machines
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with a total cost of P120,000.

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Analysis Cash, an asset account is increased. Sewing Machine, also an asset account,
is increased. Faye, Capital, an owner’s equity or capital account, is also
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increased.
Rule Debit to increase an asset, credit to increase owner’s equity.
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Entry Debit Cash, debit Sewing Machine, credit Faye, Capital.

July 2 Purchased sewing supplies and materials for cash, P5,000.
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Analysis Sewing Supplies, an asset account, is increased. Cash, also an asset account,
is decreased.
Rule Debit to increase an asset, credit to decrease an asset.
Entry Debit Sewing Supplies, credit Cash.
July 2 Paid in advance, rent for two months, P6,000.

Analysis Prepaid Rent, an asset account, is increased. Cash, another asset account is
decreased.
Rule Debit to increase an asset, credit to decrease an asset.
Entry Debit Prepaid Rent, credit Cash.

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July 8 Completed sewing job from customers and received cash of P18,000.

Analysis Cash, an asset account, is increased. Service Fee, a revenue account, is

increased.
Rule Debit to increase an asset, credit to increase revenue.
Entry Debit Cash, credit Service Fee.

July 9 Bought additional sewing supplies on account, P3,000.

Analysis Sewing Supplies, an asset account, is increased. Accounts Payable, a liability

account, is also increased.
Rule Debit to increase an asset, credit to increase a liability.
Entry Debit Sewing Supplies, credit Accounts Payable.

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July 11 Completed a sewing job from customers on account, P20,000.

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Analysis Accounts Receivable, an asset account, is increased. Service Fee, a revenue
account, is also increased.

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Rule Debit to increase an asset, credit to increase revenue.

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Entry Debit Accounts Receivable, credit Service Fee.
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July 11 Received P10,000 for sewing job completed.
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Analysis Cash, an asset account, is increased, Service Fee, a revenue account, is also
increased.
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Rule Debit to increase an asset, credit to increase revenue.

Entry Debit Cash, credit Service Fee.
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July 12 Paid the biweekly wages of sewers, P5,400.

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Analysis Wages Expense, an expense account, is increased. Cash, an asset account, is

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decreased.
Rule Debit to increase an expense, credit to decrease an asset.
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Entry Debit Wages Expense, credit Cash.

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July 16 Received P10,000 from customers on account (refer to July 11

transaction).

Analysis Cash, an asset account, is increased. Accounts Receivable, another asset

account, is decreased.
Rule Debit to increase an asset, credit to decrease another asset.
Entry Debit Cash, Credit Accounts Receivable.

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July 18 Faye withdrew P5,000 from the business for personal living expenses.

Analysis Faye, Drawing, a drawing account, is increased. Cash, an asset account, is

decreased.
Rule Debit to increase drawing, credit to decrease an asset.
Entry Debit Faye, Drawing, credit Cash.

July 23 Paid P2,000 for sewing supplies purchased on account (refer to July 9
transaction).

Analysis Accounts Payable, a liability account, is decreased. Cash, an asset account is

decreased.

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Rule Debit to decrease a liability, credit to decrease an asset.
Entry Debit Accounts Payable, credit Cash.

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July 26 Paid biweekly wages of sewers, P6,000.

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Analysis Wages Expense, an expense account, is increased. Cash, an asset account, is

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decreased.
Rule Debit to increase an expense, credit to decrease an asset.
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Entry Debit Wages Expense, credit Cash.
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July 31 Received P5,000 cash from a customer as down payment for 50 sets of
high school uniform to be delivered on August 15, 2018.
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Analysis Cash, an asset account, is increased. Unearned Revenue, a liability account,

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is also increased.
Rule Debit to increase an asset, credit to increase a liability.
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Entry Debit Cash, credit Unearned Revenue.

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July 31 Paid utility bills of P2,000.

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Analysis Utilities Expense, an expense account, is increased. Cash, an asset account, is

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decreased.
Rule Debit to increase an expense, credit to decrease an asset.
Entry Debit Utilities Expense, credit Cash.

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2. Journalizing – recording of transactions in a journal.

GENERAL JOURNAL
Page 1
Date Post
2019 Description Ref. Debit Credit
July 1 Cash 11 30,000
Sewing Machine 16 120,000
Faye, Capital 31 150,000
Initial investment made by the owner.

2 Sewing Supplies 13 5,000

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Cash 11 5,000
Purchase of sewing supplies for cash.

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2 Prepaid Rent 14 6,000
Cash 11 6,000

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Payment for two months rent.

8 Cash
Service Fee US 11
41
18,000
18,000
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Receipt of cash for job completed.
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9 Sewing Supplies 13 3,000

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Accounts Payable 21 3,000

Purchase of sewing supplies on
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account.

11 Accounts Receivable 12 20,000

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Service Fee 41 20,000

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Service fee earned for job completed

from customers on account.
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11 Cash 11 10,000
Service Fee 41 10,000
Receipt of cash for job completed.

12 Wages Expense 51 5,400

Cash 11 5,400
Payment of biweekly wages.

16 Cash 11 10,000
Accounts Receivable 12 10,000
Collection from customers on account.

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 Page 2
Date Post
2019 Description Ref. Debit Credit
July 18 Faye, Drawing 32 5,000
Cash 11 5,000
Withdrawal of cash by owner for
personal living expenses.

23 Accounts Payable 21 2,000

Cash 11 2,000
Partial payment of account

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26 Wages Expense 51 6,000
Cash 11 6,000

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Payment of biweekly wages.

31 Cash 11 5,000

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Unearned Revenue 23 5,000

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Down payment for sewing job to be
delivered on August 15. T
31 Utilities Expense 55 2,000
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Cash 11 2,000
Payment for utility bills.
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Common errors committed in recording transactions in the journal -

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For July 1 transaction -

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July 1 Cash 11 30,000

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Sewing Machine 16 120,000

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Faye, Capital 31 150,000

Initial investment made by the owner.

or

July 1 Faye, Capital 31 150,000

Cash 11 30,000
Sewing Machine 16 120,000
Initial investment made by the owner.

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or

July 1 Cash 11 30,000

Sewing Machine 16 120,000
Faye, Capital 31 150,000
Initial investment made by the
owner.

or

July 1 Cash 11 30,000

Sewing Machine 16 120,000

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Faye, Capital 31 150,000
Initial investment made by the owner.

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For July 11 transaction – (explanation exceeds one line)

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July 11 Accounts Receivable 12 20,000
Service Fee 41
20,000
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Service fee earned for job completed from
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customers on account.
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or
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July 11 Accounts Receivable 12 20,000

Service Fee 41
20,000
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Service fee earned for job completed

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from customers on account.

or
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July 11 Accounts Receivable 12 20,000

Service Fee 41
20,000
Service fee earned for job completed
from customers on account.

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3. Posting – transfer of entries from journal to ledger.

(Using the journal entries of the D’ Fashionista.)

GENERAL LEDGER

Account: Cash Acct. No. 11

Date Post
2019 Description Ref. Debit Credit Balance
July 1 J-1 30,000 30,000
2 J-1 5,000 25,000
2 J-1 6,000 19,000
8 J-1 18,000 37,000

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11 J-1 10,000 47,000
12 J-1 5,400 41,600

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16 J-1 10,000 51,600
18 J-2 5,000 46,600

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23 J-2 2,000 44,600

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26 J-2 6,000 38,600
31 J-2 5,000 43,600
31 J-2 2,000 41,600
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EN

Account: Accounts Receivable Acct. No. 12

Date Post
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2019 Description Ref. Debit Credit Balance

July 11 J-1 20,000 20,000
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16 J-1 10,000 10,000

Account: Sewing Supplies Acct. No. 13

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Date Post
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2019 Description Ref. Debit Credit Balance

July 2 J-1 5,000 5,000
9 J-1 3,000 8,000
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Account: Prepaid Rent Acct. No. 14

Date Post
2019 Description Ref. Debit Credit Balance
July 2 J-1 6,000 6,000

Account: Sewing Machine Acct. No. 16

Date Post
2019 Description Ref. Debit Credit Balance
July 1 J-1 120,000 120,000

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Account: Accounts Payable Acct. No. 21
Date Post
2019 Description Ref. Debit Credit Balance
July 9 J-1 3,000 3,000
23 J-2 2,000 1,000

Account: Unearned Revenue Acct. No. 23

Date Post
2019 Description Ref. Debit Credit Balance
July 31 J-2 5,000 5,000

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Account: Faye, Capital Acct. No. 31
Date Post
2019 Description Ref. Debit Credit Balance

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July 1 J-1 150,000 150,000

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Account: Faye, Drawing Acct. No. 32
Date Post
2019 Description Ref. Debit Credit Balance
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July 18 J-2 5,000 5,000
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Account: Service Fee Acct. No. 41

Date Post
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2019 Description Ref. Debit Credit Balance

July 8 J-1 18,000 18,000
11 J-1 20,000 38,000
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11 J-1 10,000 48,000

CP
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Account: Wages Expense Acct. No. 51

Date Post
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2019 Description Ref. Debit Credit Balance

July 12 J-1 5,400 5,400
26 J-2 6,000 11,400

Account: Utilities Expense Acct. No. 55

Date Post
2019 Description Ref. Debit Credit Balance
July 31 J-2 2,000 2,000

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4. Preparation of a trial balance.

In double-entry bookkeeping, the recording and posting functions maintain the equality of
the debits and credits. Debit entries in the general journal are transferred to the debit column
of the proper ledger accounts and credit entries are transferred to the credit column of the
proper ledger accounts. Proof of the equality of the debits and the credits in the general ledger
is obtained periodically by preparing a trial balance.

A trial balance is a list of all accounts with open balances in the general ledger. It proves
the equality of the debit and credit in the general ledger but it does not check or vouch the
accuracy of the report.

The Trial Balance Procedure (for a three-column account)

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(To the teacher: Use the ledger accounts of the D’ Fashionista to illustrate the procedure.)

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The following procedure should be observed in the preparation of the trial balance:
1 The heading of the trial balance should include

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a. name of the business or the owner

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b. title of the list (Trial Balance)
c. date of the trial balance
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2 Two money columns should be provided, one debit and one credit.
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3 List down the accounts with open balances under the same margin.
4 Get the account balance of each ledger account and write them under their
corresponding debit or credit column. Be sure to know the normal balance of each
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account.
5 Foot or add the debit and credit columns of the trial balance. Footings of the money
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columns must be on the same line.

6 Check whether the debit totals and the credit totals are equal. They must be equal,
otherwise, your trial balance has error.
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CP

For a two-column account, the following steps are observed in getting the balance of an
account:
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1. Add the debit postings and the credit postings.

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2. Get the difference.

3. If the total debits of an account is more than the total credits, the account is said to have
a debit balance.
4. If the total credits is more than the total debits, the account has a credit balance.
5. Accounts with either a debit balance or a credit balance are accounts with open balances
and are the ones listed in the trial balance.

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A trial balance prepared for the D’ Fashionista is given below.

D’ Fashionista
Trial Balance
July 31, 2019
Debit Credit
Cash 41,600
Accounts Receivable 10,000
Sewing Supplies 8,000
Prepaid Rent 6,000
Sewing Machine 120,000

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Accounts Payable 1,000
Unearned Revenue 5,000

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Faye, Capital 150,000
Faye, Drawing 5,000

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Service Fee 48,000

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Wages Expense 11,400
Utilities Expense 2,000
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204,000 204,000
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(A trial balance of balances)

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CP
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FO

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The Significance of the Trial Balance

The trial balance does not give us the complete proof that the postings in the ledger are
accurate. It simply shows the equality of the debits and credits. It also helps detect errors.

When the two totals of the trial balance are not equal, it may be due to one or more of the
following errors:

1. Error in preparing the trial balance.

a. The debit or the credit column of the trial balance was incorrectly added.
b. An account balance was incorrectly transferred to the trial balance.
c. A debit balance was transferred as a credit, or a credit balance as a debit, or a
balance was omitted entirely.

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2. Error in determining the account balances.

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a. Error in computing the account balance.
b. A debit balance was entered in the credit balance column or vice versa.

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3. Error in recording a transaction in the ledger.

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a. Posting an erroneous amount to the ledger account.
b. Posting of a debit entry as a credit or vice versa.
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c. Posting to a debit or credit side of an account was omitted.
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Sometimes, the two totals of the trial balance are equal, but then errors may be present.
Among them are as follows:
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1. A transaction was not recorded in the journal or a transaction was not posted in the
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ledger.
2. The same erroneous amount was recorded in both the debit and the credit part of the
transaction.
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3. A transaction was recorded more than once.

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4. A transaction was posted correctly as a debit or credit but to the wrong account.
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Extra care should be exercised in the recording of transactions in the journal and posting
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to the ledger to avoid these errors.

How to Discover Errors Using the Trial Balance

If the two totals of the trial balance are not equal, the following procedures are suggested
to locate the error:
1. Re-add the columns of the trial balance.
2. Get the difference between the two totals.
a. If the difference is 1, 10, 100, 1,000, etc., the error may be due to addition, or in
the addition or subtraction of figures in determining account balances. In this case,
check the addition of the debit and credit columns of the trial balance. If the error
is not located, verify the postings and the balances of the ledger accounts.

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 b. If the difference is divisible by 2, an account with a balance equal to the difference
was omitted in the trial balance or an account with a balance equal to the
quotient of the above division was transferred to the trial balance on the wrong
side, that is, a debit balance was placed under the credit column or vice versa.

This error may also be due to the following:

1. A credit entry was not posted to the ledger.
2. A debit entry was posted as a credit to the ledger account or vice versa.

For this kind of error, scan the ledger account balances and check the figures in the
trial balance. If the error is not located, check the entries in the ledger accounts.

c. If the difference is divisible by 9, the error may be due to transposition or a

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transplacement or slide.

ON
Transposition– is an interchange in the order of digits of a number or an
erroneous rearrangement of digits.
Example: 25 for 52; 326 for 236; 892 for 928

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Transplacement or slide- the entire number is erroneously moved one or more

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spaces to the right or to the left.
Example: 360 is written as 3.60; 47.80 is written as 4,780
T
EN
In this case, check the figures in the trial balance and in the ledger accounts for
any transposition or transplacement or slide.
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In case the errors cannot be discovered using the suggested procedures, retrace the various
steps in the accounting process starting with the last step and working back to the entries in the
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journal.
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Correction of Errors
CP

Despite the exercise of extra care in the recording of transactions in the journal and in
posting to the ledger, it is inevitable that error will sometimes be made. Errors should not be
R

erased as it may arouse suspicion of dishonesty. The correction to be made depends on the
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nature of the error and the time it is discovered.

Case 1 - An incorrect account title or amount, discovered before the item has been posted.

Correction: Draw a line through the error and write the correct account title or
amount immediately above.

Cash 4,000
Accounts Receivable
Sales 4,000

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Case 2 - An incorrect posting to an account.

Correction: Cross out the incorrect amount and insert the correct figure
immediately above.

Office Supplies

4,000
40,000

Case 3 - An erroneous account title was used when the transaction was recorded in the

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journal and posting has been completed.

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Correction: Make a correcting entry.

Illustration: Transaction – Purchased office supplies on account, P5,000.

E
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Entry made:
Office Equipment 5,000
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Accounts Payable 5,000
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Entry that should have been made:

Office Supplies 5,000
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Accounts Payable 5,000

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Correcting entry:
Office Supplies 5,000
Office Equipment 5,000
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CP

Effect in the correction of the ledger account:

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Office Supplies Office Equipment Accounts Payable

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5,000 5,000 5,000 5,000

After posting the correcting entry, the ledger account entries are corrected.

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Exercise 4-1 - True or False - Write C if the statement is correct and W if incorrect.
____ 1. A transaction is entered in a journal before it is entered in ledger accounts.
____ 2. Recording is the last phase of accounting.
____ 3. In recording business transactions using forms with ruled money columns, the
bookkeeper should write a double zero or a dash in the centavo column if there is no centavo.
____ 4. Every business transaction affects a minimum of two accounts.
____ 5. The specific titles and numbers used in the chart of accounts should be uniform for
all businesses.
____ 6. When a journal entry is erroneous, the best thing to do is to leave it because the
owner has no knowledge about accounting.
____ 7. The trial balance does not give us the complete proof that postings in the ledger
accounts are accurate.
____ 8. The interchange in the order of digits is called transposition.

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____ 9. Transplacement or slide means that the entire number is erroneously moved one or
more spaces to the right or to the left.

ON
____ 10. When the two columns of the trial balance are equal, the recording and posting of
business transactions are correct.
____ 11. The purpose of the trial balance is to check the mathematical accuracy in posting

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and getting the balances of the accounts.

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____ 12. A simple entry contains one debit and two credits.
____ 13. There is no indention for the accounts debited and credited in a journal entry.
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____ 14. Posting is in itself the classifying function of accounting.
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____ 15. The simplest form of an account is T-account.

Exercise 4-2 –Identification–Identify the terms referred to in each statement.

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_______________ 1. An accounting device used in summarizing the changes in assets,

liabilities, capital, revenue and expenses due to occurrence of a business transaction.
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_______________ 2. The process of recording transactions in the journal.

_______________ 3. The book of original entry.
_______________ 4. Book of final entry.
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_______________ 5. It refers to the complete set of information written in the journal.

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_______________ 6. A journal entry which contains one debit and one credit.
_______________ 7. A journal entry that has multiple debits or credits.
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_______________ 8. Group of related accounts.

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_______________ 9. The process of transferring the same information found in the journal
to the ledger.
_______________ 10. List of account titles classified or arranged according the to statement
wherein they appear.
_______________ 11. Shows the equality of the debits and credits.
_______________ 12. An error in which the order of digits in a number is changed.
_______________ 13. An error in which the entire number is moved one or more spaces to
the right or to the left.
______________ 14. A term used for adding the column of figures.
______________ 15. The right side of an account.

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Exercise 4-3 – Multiple Choice -Encircle the letter of the best answer.
1. The first step in the accounting process is -
A. correcting a journal entry.
B. identifying transactions in the journal.
C. identifying transactions through source documents.
D. post journal entries to the ledger.
2. When an asset increases, one of the following must occur:
A. a liability decreases. C. income increases.
B. an expense increases. D. owner’s equity decreases.
3. Payment to supplier’s account may result to –
A. credit to supplier’s account C. debit to payable account
B. debit to cash account D. debit to receivable account
4. A collection from customer’s account may result to a –

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A. credit to accounts receivable C. credit to cash
B. debit to accounts receivable D. debit to accounts payable

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5. When services are rendered for cash –
A. cash will decrease C. no effect in cash
B. cash will increase D. service fee will decrease

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6. A statement that summarizes the debit and credit entries of each account in a general

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ledger -
A. income statement C. statement of financial position
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B. statement of account D. trial balance
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7. Accounts in the ledger are arranged in what sequence?
A. accounts with debit balances first, followed by accounts with credit balances
B. alphabetically
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C. chronologically
D. financial statements order
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8. Which of the following tools is used by the accountant principally for proving the
equality of debit and credit balances?
A. income statement C. T-account
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B. statement of financial position D. trial balance

CP

9. Which of the following errors cannot be revealed by a trial balance?

A. A journal entry that has not been posted in its entirety.
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B. Erroneous computation of an account balance.

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C. Omission in posting of either a debit or credit entry in the journal.

D. Posting the amount of an item to a wrong side of the account or ledger.
10. Which of the following errors will not cause the debit and credit columns of the trial
balance to be unequal?
A. A debit entry was recorded in the wrong account.
B. A debit was entered an account as a credit.
C. The account balance was carried to the wrong column of the trial balance.
D. The balance of an account was incorrectly computed.
11. When an amount is placed on the left side of an account, it is said to be –
A. credited. C. decreased.
B. debited. D. increased.

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 12. In a trial balance, when an error has been made that is evenly divisible by 9, then
what was the probable nature of the error?
A. A debit was recorded as a credit, or vice versa.
B. A decimal point was displaced.
C. The debit or credit column was added incorrectly.
D. Two numbers in an amount were transposed.
13. Why do accountants record transactions in the journal?
A. To ensure that all transactions are posted to the ledger.
B. To ensure that total debits equal total credits.
C. To have a chronological record of all transactions.
D. To help prepare the financial statements.
14. The purpose of the trial balance is to
A. Ensure that all transactions have been recorded.

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B. Increase assets and owner’s equity.
C. List all the accounts with their balances.

ON
D. Speed the collection of cash receipts from the customers.
15. An account is said to have a debit balance if –
A. Its normal balance is debit without regard to the amounts or number of entries on

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the debit side.

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B. The amount of the debits exceeds the amount of the credits.
C. The last entry of the accounting period was posted on the debit side.
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D. There are more entries on the debit side than on the credit side.
EN

Exercise 4-4 – Determine whether the following errors, each considered individually, will
cause the trial balance totals to be unequal or still be equal. Check the appropriate column.
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Unequal Equal
ST

1. A payment of P15,400 for equipment purchased was posted as

a debit to Equipment, P15,000 and a credit to Cash, P15,400. __________ _________
2. A purchase of office supplies for P1,000 cash was
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recorded twice. _________ _________

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3. A debit entry of P385 for Office Equipment was posted

as a debit of P583. _________ _________
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4. A debit balance of P15,000 for Accounts Receivable

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was transferred to the trial balance as P1,500. _________ _________

5. A fee of P15,000 earned and due from a client was not
debited to Accounts Receivable or credited to Service Fee
because the cash has not been received. _________ _________
6. A purchase of office tables and chairs for P10,000, on
account, was not recorded. _________ _________
7. A payment of P8,000 to a creditor was posted as a credit to
Accounts Payable, P8,000 and a credit to Cash, P8,000. _________ _________
8. A receipt of P10,000 for services rendered was recorded
as a debit to Cash, P1,000 and a credit to Service Fee,
P1,000. _________ _________

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 9. A withdrawal of P4,000 by the owner was journalized and
posted as a debit to Salary Expense, P4,000 and a credit to
Cash, P4,000. _________ _________
10. A credit balance of P3,000 for Accounts Payable was
transferred to the trial balance as a debit balance. _________ _________

Problem 4-1
Andy Lim invests in a Shoe and Bag Repair Shop. The following transactions took place
in June of the current year.

June 1 The owner invested P50,000 cash which he deposited in the bank.
4 Borrowed money from the same bank an amount of P60,000 by signing a note
with an interest of P6,000 in 1 year, deducted in advance. Net proceeds is

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P54,000.
5 Bought various shop supplies on account, P10,000.

ON
8 Rendered repair services to various customer on account, P6,000.
13 Partially paid the June 4 account, P5,000.
13 Paid the space rental for the month, P2,000.

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15 Rendered repair services for cash, P28,000.

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19 The owner withdrew cash of P5,000 for personal use.
23 Paid taxes and licenses, P1,700.
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30 Collected P5,000 from customers on account.
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30 Paid light and water bills for the month, P900.

Required: Record the above transactions on a two-column journal using the following
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accounts: Cash in Bank, Accounts Receivable, Shop Supplies Inventory, Prepaid Interest,
Accounts Payable, Note Payable, Andy Lim, Capital, Andy Lim, Drawing, Service Revenue,
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Rental Expense, Taxes and Licenses, and Utilities Expense.

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Problem 4-2
Mike opened a repair shop which he called Big M Repair Shop. During May 2019, his
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first month of operations, he completed the following transactions:

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May 2 Mike invested P150,000 cash in an auto repair shop.

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2 Bought necessary repair equipment from 3B Auto Supply for P60,000, paying
P40,000 in cash and the balance to be paid within 30 days.
7 Purchased tools for cash, P12,000.
7 Paid the rent on the shop space, P4,000.
8 Paid taxes and licenses, P4,000.
11 Services rendered for cash, P45,000.
18 Services rendered to Jam, P20,000, on credit.
21 Mike transferred his truck for the exclusive use in the business P80,000.
25 Mike withdrew cash of P3,000 for his personal use.
31 Paid the wages of the shop helpers, P8,000.
31 Gave a promissory note to 3B Auto Supply in the amount of P20,000 as a
temporary settlement of his liability.

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Required: Record the above transactions in a two-column journal using the following
accounts: Cash; Accounts Receivable; Tools; Repair Equipment; Truck; Notes Payable;
Accounts Payable; Mike, Capital; Mike, Drawing; Service Income; Rent Expense; Wages
Expense; Taxes and Licenses.

Problem 4-3
On June 1, 2019, Raffy opened the Raffy’s Internet Café. The following transactions
occurred during the month:

June 1 Raffy invested cash of P200,000 and equipment costing P60,000.

1 Paid taxes and licenses, P5,000.
2 Paid three months rent in advance, P9,000.
4 Purchased additional equipment on account, P40,000.

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5 Purchased supplies for cash, P4,000.
15 Received P40,000 cash for services rendered to customers.

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18 Paid P30,000 for equipment purchased on account.
22 Withdrew P5,000 cash for personal expenses.
25 Billed customers on account, P30,000.

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30 Received P25,000 cash from customers on account.

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30 Paid telephone bill, P2,500.
30 Paid electricity bill, P5,000.
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30 Paid wages of personnel, P10,000.
EN

Instructions:
1. Raffy’s Internet Café uses the following accounts in recording business transactions:
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Cash; Accounts Receivable; Supplies Unused; Prepaid Rent; Equipment; Accounts

Payable; Raffy, Capital; Raffy, Drawing; Service Income; Wages Expense; Taxes and
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Licenses; Telephone Expense; Utilities Expense.

2. Prepare journal entries to record the above transactions.
3. Post the journal entries to the ledger, inserting appropriate posting references as each
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item is posted. Get the balance of the account after each entry.
CP

4. Prepare a trial balance.

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Problem 4-4
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On July 1, 2019, Mr. Yu opened the Extra Bilis Delivery Services. The following
transactions took place during the month:

July 1 Mr. Yu withdrew P200,000 cash from his personal savings account and invested it
in the business. He also invested a delivery van with fair market value of
P300,000.
2 Extra Bilis rendered P30,000 delivery services on account.
3 Bought office equipment from 3-A Marketing, P40,000, on account.
9 Delivery services rendered to clients for cash, P40,000.
16 Paid 3-A Marketing in full.
18 Collected P20,000 from customers on account.

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 22 Withdrew cash, P10,000 for personal use.
29 Paid telephone bill for the month, P2,000.
29 Paid utilities for the month, P3,000.
31 Paid delivery boy’s salary, P6,000.

Instructions:
1. Extra Bilis Delivery Services uses the following accounts in recording business
transactions:
Cash; Accounts Receivable; Office Equipment; Delivery Van; Accounts Payable;
Mr. Yu, Capital; Mr. Yu, Drawing; Service Income; Salary Expense; Telephone
Expense; Utilities Expense.
2. Prepare journal entries to record the above transactions.
3. Post the journal entries to the ledger, inserting appropriate posting references as each

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item is posted. Get the balance of the account after each entry.
4. Prepare a trial balance.

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Problem 4-5
Eva Yan Medical Clinic uses the following Chart of Accounts:

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Cash 101 Eva Yan, Capital 301

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Accounts Receivable 102 Eva Yan, Drawing 302
Supplies Unused 103 Professional Fee 401
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Land 104 Salaries Expense 501
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Building 105 Advertising Expense 502
Furniture & Fixtures 106 Telephone & Utilities Expense 503
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Equipment 107 Taxes and Licenses 504

Accounts Payable 201 Miscellaneous Expense 505
Mortgage Payable 202
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The following transactions took place during her first month of operations:
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CP

April 1 Eva Yan invested P100,000 cash, and land and building worth P2,000,000 into
her medical business. The land has a fair market value of P1,000,000 and is
mortgaged for P500,000.
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3 Paid city taxes of P8,000, including her license to operate.

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5 Purchased furniture worth P50,000, paying P20,000 and the balance on

account.
6 Paid advertising expense, P5,000.
10 Billed patients for services rendered, P80,000.
11 Purchased supplies for cash, P4,000.
12 Purchased computer for P30,000 paying 30% down payment.
12 Received cash for services rendered, P100,000.
13 Received 50% from customers billed last April 10.
13 Paid semi-monthly salaries of employees, P15,000.
17 Billed customers for services rendered amounting to P70,000 with P20,000 paid,
the balance to be paid next month.

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 20 Withdrew P6,000 cash for personal use.
23 Paid PLDT and PECO bills, P2,000.
26 Paid P100,000 as monthly amortization on the mortgage.
27 Paid the balance on the furniture purchased last April 5.
29 Received cash from customers on account, P24,000.
30 Paid the salaries for the second half of the month, P15,000.
30 Paid miscellaneous expenses, P2,000.

Instructions:
1. Prepare journal entries to record the above transactions.
2. Post the journal entries to the ledger, inserting appropriate posting references as each
item is posted. Get the balance of the account after each entry.
3. Prepare a trial balance.

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Problem 4-6

ON
The preliminary trial balance of ABC Enterprises presented below does not balance.
ABC Enterprises

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Trial Balance

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April 30, 2019
Debit Credit
T
Cash 114,000
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Accounts Receivable 27,400

Prepaid Insurance 3,000
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Equipment 39,200
Accounts Payable 19,200
Salaries Payable 2,000
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Pearl, Capital 60,200

Pearl, Drawing 3,600
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Service Revenue 26,000

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Salaries Expense 13,600

Advertising Expense 2,000
Miscellaneous Expense 1,600
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198,200 113,600
FO

When the ledger and other records are reviewed, you discovered the following:
1. The debit total and the credit total in the cash account are P114,000 and P94,400,
respectively.
2. A receipt of P600 from a customer on account was not posted to the accounts
receivable account.
3. A payment of P1,600 to a creditor on account was not posted to the accounts
payable account.
4. The balance of the equipment account is P35,600.
5. Each account had a normal balance.

Required: Prepare a corrected trial balance.

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Problem 4-7

Below is the trial balance of Cool Air Repair Center which does not balance.

Cool Air Repair Center

Trial Balance
March 31, 2019
Debit Credit
Cash 230,200
Accounts Receivable 45,400
Office Equipment 23,000
Accounts Payable 25,000

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Tony, Capital 250,000
Tony, Drawing 15,000

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Repair Revenue 69,500
Wages Expense 7,000
Taxes and Licenses 6,000

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Advertising Expense 4,000

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565,600 109,500

The following errors were discovered:

T
1. All accounts were traced from the general ledger and it was discovered that the
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capital and drawing accounts were not properly listed in their normal balances.
2. There was a transposition error in posting the services rendered on account. A
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correct posting was made to Repair Revenues account of P4,500 but Accounts
Receivable was debited by P5,400.
3. A sliding error was committed in posting cash collection from customer’s
ST

account. Cash was correctly debited by P2,500 but Accounts Receivable was
credited by P25,000.
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4. A posting of P5,000 in the drawing account was made, but corresponding posting
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to cash account was not made.

5. Payment of wages in the amount of P3,000 was erroneously credited to Cash by
P300.
R
FO

Required: Prepare a corrected trial balance.

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Problem 4-8

Given below are the number of errors in recording transactions. Assuming that posting to
the ledger accounts have been completed, give the necessary correcting entries that should be
made:

1. Rent for the month in the amount of P5,000 was recorded as a debit to Utilities
Expense and a credit to Cash.
2. Cash of P4,800 received from a customer on account was recorded as a debit to Cash
and a credit to Accounts Receivable for P8,400.
3. Tables and chairs purchased for P15,000 cash was recorded as a debit to Equipment
and a credit to Cash.

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4. A P8,000 payment for salaries was charged to Supplies Expense.
5. A cash withdrawal of P5,000 was debited to Bea, Capital and a credit to Cash.

ON
6. A purchase of office supplies on account, P3,000, was recorded twice.

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Problem 4-9

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Given below are the number of errors in recording transactions. Assuming that posting to
T
the ledger accounts have been completed, give the necessary correcting entries that should be
EN
made:

1. Cash received from a cash customer, P20,000, was recorded as a debit to Accounts
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Receivable, P20,000, and a credit to Sales, P20,000.

2. Purchase of repair equipment for P40,000 cash, was recorded as a debit to Equipment,
ST

P4,000, and a credit to Cash, P4,000.

3. Collection from a customer on account, P3,500, was recorded twice.
4. Payment for repair of equipment, P3,000, was recorded as a debit to Equipment,
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P3,000, and a credit to Cash, P3,000.

CP

5. Purchase of office supplies for cash, P3,000, was not recorded.

6. Payment of electric bill, P3,000, was recorded as a debit to Utilities Expense, P3,000
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and credit to Accounts Payable, P3,000.

FO

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