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TAGBILARAN CITY COLLEGE

College of Business and Industry
Tagbilaran City, Bohol

Course Code ABM101 Instructor Cristie G. Claro, CPA

Fundamentals of
Course Title Accounting, Business E-mail Address cclaro.tcc@gmail.com
and Management
Course Credits 3 units Contact Number 0946-239-6579
Course Consultation Monday, Wednesday & Friday
Bridging
Classification Hours – 5pm onwards
Consultation
Pre-requisite(s) None Online via MS Teams
Venue

Learning Module 5: Books of Accounts Double-entry System

Duration of Delivery: September 26 – 30, 2022
Due Date of Deliverables: October 3, 2022

Intended Learning Outcomes:

• Define the two books of accounts.

• Identify the uses of the two books of accounts.
• Recognize the types of journals and ledgers.
• Illustrate the formats of the books of accounts.
• Explain the rules of debits and credits.

BOOKS OF ACCOUNTS AND DOUBLE-ENTRY

SYSTEM
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.

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Types of Journals
Journal 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. Purchase journal – is used to record purchases of inventory on account.
c. Cash receipts journal – is used to record all transaction involving receipts of
cash.
d. Cash disbursement journal – is used to record all transaction involving
payments of cash.
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
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.”

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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 accounts that comprise the 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.

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Formats of the Books of Accounts

General Journal
A general journal can have the following format:

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Special Journal
A special journal can have the following format:

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.

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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 accounts
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:
Type of Account Normal balance
Asset Debit
Liability Credit
Equity Credit
Income Credit
Expense Debit

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

Illustration: Rules of debits and credits

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 payment of
₱8,000.
Requirement: Using “T-account” analysis, compute for the ending balance of your cash.

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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 payables 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.

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 Cash payments
1,500 Ending balance

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.

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➢ 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).
➢ If an account has a normal debit balance, its adjunct account has a normal
debit balance (the same).
On the other hand:
➢ If an account has a normal credit balance, its contra account has normal debit
balance (the opposite).
➢ If an account has a normal credit balance, its adjunct account has a normal
credit balance (the same).
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 the account.
Example 1:
Your accounts receivable has a balance of ₱100,000, while the related allowance for
bad debts account has a balance of ₱20,000. How much is the carrying amount of your
accounts receivable?
Solution:
Accounts receivable ₱100,000
Allowance for bad debts (20,000)
Accounts receivable – net ₱ 80,000

The “Allowance for bad debts” is deducted because it is a contra account to

“Accounts receivable.”

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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 (20,000)
Building – net ₱ 700,000

References:
• Financial Accounting and Reporting (Fundamentals) by Zues Vernon B. Millan
• Lopez, R. (2016). Fundamentals of Accounting (Simplified Procedural Approach). MS
LOPEZ Printing and Publishing
• Valix, C., and Valix, C. (2019). Practical Financial Accounting 1. GIC Enterprises & Co.,
Inc.

Cristie Claro, CPA