ONLINE LEARNING MODULE

ACCT 1026 (Financial Accounting and Reporting)

Academic Year 2020-2021

Lesson 1: Introduction to Accounting

Topic: a. Definition of accounting

b. Nature of accounting
c. Functions of Accounting in Business
d. Brief history of accounting
e. Common branches of accounting
f. Users of accounting information
g. Forms of business organizations and their advantages and disadvantages
h. Types of businesses according to activities and their advantages and
disadvantages

Learning Outcomes: At the end of this module, you are expected to :

1. Expound the definition, nature functions, and brief history of accounting.
2. Discuss the common branches of accounting and its users.
3. Identify the forms of business organization and their advantages and
disadvantages
4. Explain the types of businesses according to activities and their
advantages and disadvantages

LEARNING CONTENT

Introduction:
This introductory lesson focuses on reinforcing your prior knowledge on accounting. You have studied
this already in your Senior High School but are you really ready to do bookkeeping for a simple business entity.
Can you now help the street vendor selling finger foods account for his sales, expenditures and income? Can
you now assist the sari-sari store owner prepare his financial statements which is needed in registering his
business with the DTI? If you are approached by an investor contemplating to engaged into business, which
form and type of organization are you going to recommend especially during this time of pandemic? All this will
be confirmed as we go along the discussions.

Moreover, what would your response should I ask you the e question “Why is accounting important?” A
lot of people would answer that accounting plays a vital role in running a business because it helps you track
income and expenditures, ensure statutory compliance, and provide investors, management, and government
with quantitative financial information which can be used in making business decisions. Further, you would also
hear reasons such as the following
1. It Helps in Evaluating the Performance of Business
2. It Ensures Statutory Compliance
3. It Helps to Create Budget and Future Projections
4. It Helps in Filing Financial Statements
Needless to say, accounting plays a critical role in various scenarios.

Lesson Proper:

To start with, we define Accounting as a process of identifying, recording and communicating economic
information that is useful in making economic decisions.

Pero medyo mahirap yata unawain. Okey, let us dissect the definition| by looking into the essential elements.

a. Identifying – The accountant analyzes each business transaction and identifies whether the transaction
is an “accountable event” or “non-accountable event.” This is because only “accountable events” are
recorded in the accounting books. “Non-accountable events” are not recorded in the accounting books.

Accountable events are those that affects the resources, obligations, income and expenditures of a
business

b. Recording – The accountant recognizes (i.e., records) the “accountable events” he has identified. This
process is called “journalizing.”

ACCT 1026- Financial Accounting and Reporting | 1

 After journalizing, the accountant then classifies the effects of the event on the “accounts.” This process
is called “posting.”

Account is the basic storage of in formation in accounting such as cash, receivable, land, equipment, etc.

c. Communicating – At the end of each accounting period, the accountant summarizes the information
processed in the accounting system in order to produce meaningful reports. Accounting information is
communicated to interested users through accounting reports, the most common form of which is the
financial statements

processs art

Accounting

service
science

Information
system

Other definitions of accounting are:

 As a science, it is a body of knowledge which has been systematically gathered, classified and
organized
 As a practical art, it requires the use of creative skills and judgment.
• Recording (Journalizing) - systematically maintaining a record of all economic business
transactions after they have been identified or measured
• Classifying (Posting to the Ledger) - sorting or grouping of similar and interrelated economic
transactions into their respective classes.
• Summarizing – preparation of financial statements
• Interpreting results – demands critical thinking and creative skills
 As a service activity, it provides quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions
 An information system that measures, process and communicates financial information about and
economic entity. It consists of an input (accountable events), process (recording, classifying, and
summarizing) and the output (accounting report that is communicated to the users).

After knowing the different definitions of accounting, what therefore is the nature of accounting?

Accounting is a process with the basic purpose of providing information about economic activities intended to be
useful in making economic decisions.

How does accounting help financial users see the true picture of the business in financial terms?
a. Reports are understandable, readable, relevant and complete
b. Management must have the right information at the right time in the right way to keep due control
over the business affairs

There are three types of information provided by accounting. These are

a. Quantitative information – information expressed in numbers, quantities or units
b. Qualitative information – information expressed in words or descriptive form
c. Financial Information – information expressed in money values,
 Accounting and bookkeeping are NOT the same.

 Bookkeeping is the process of recording the

accounts or transactions of an entity, ending with the
preparation of the trial balance. Bookkeeping does
not require the interpretation of the significance of
the information processed.

 Accounting covers the whole process of identifying,

recording, and communicating information to
interested users.

Stages in Accounting Accounting vs. Auditing

 Bookkeeping - recording of transaction and accurate

record keeping or the “how”

 Accounting - Methodology and Reporting or “why”

 Auditing - Credibility of reports and ensures

confidence of financial use

Financial Accounting vs. Managerial Accounting

Accounting vs. Accountancy

Accounting Accountancy
• Process of data • Profession or
analysis and practice of
evaluation expertise

Users of Accounting Information

Accounting is often referred to as a language of business because it is fundamental to the communication of

financial information. In a business, accounting provides

1. external users with information that is useful in making investment and credit decisions; and
2. internal users with information that is useful in managing the business. .

Internal users – those who are directly involved in managing the business.

• Business owners who are directly involved in managing the business

• Board of directors who would formulate policies and guidelines for the entity
• Managerial personnel for their guidance on how well they are running the business

External users – those who are not directly involved in managing the business.
• Existing and potential investors (e.g., stockholders who are not directly involved in managing the
business) to be assured of the yield on money invested
• Lenders (e.g., banks) and Creditors (e.g., suppliers) that they be paid on due date.
• Government Agencies for allocation of resources and regulation of activities
• Non-managerial employees for profitability and security of tenure
• Customers for the continuation of the entity
• Public to be informed of trends and development
Types of accounting information according to purpose
1. General – information designed to meet the common needs of most statement users. It is provided by
financial accounting and is prepared primarily for external users.
2. Special – information designed to meet the specific needs of particular statement users. It is provided
by management accounting or other branches of accounting and is prepared primarily for external
users.

Hello guys, okey pa ba kayo? Kaya pa ba natin intindihin ang ating discussions? Sige magkwentuhan muna
tayo. Tignan natin ang kasaysayan ng accounting.

. Brief history of accounting

• Accounting can be traced as far back as the prehistoric times, perhaps more than 10,000 years ago.
• Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia which were usually cones,
disks, spheres and pellets. These tokens correspond to commodities like sheep, clothing or bread.
They were used in the Middle West in keeping records. After some time, the tokens were replaced by
wet clay tablets. During such time, experts concluded this to be the start of the art of writing. (Source:
http://EzineArticles.com/456988)
• Double entry records first came out during 1340 A.D. in Genoa.
• In 1494, the first systematic record keeping dealing with the “double entry recording system” was
formulated by Fra Luca Pacioli, a Franciscan monk and mathematician. The “double entry recording
system” was included in Pacioli’s book titled “Summa di Arithmetica Geometria Proportioni and
Proportionista,” published on November 10, 1494 in Venice.
• The concept of “double entry recording” is being used to this day. Thus, Fra Luca Pacioli is considered
as the father of modern accounting.

Source: https://efinancemanagement.com/financial-accounting/branches-of-accounting
Common Branches of Accounting

Branch of Accounting Type of accounting service Users of service

provided
Financial Accounting  General Record Keeping • All businesses use financial accounting in
(maintenance of Journals and recording-keeping. These records provide
Ledgers) information that is used in the other
branches of accounting.

 Preparation of general purpose • Business prepare general purposes

financial statements financial statements at least annually for
the use of lenders, investors or
government regulatory bodies.
Management  Preparation of specifically • Required by management to aid them in
Accounting tailored management reports performing their management functions.
Government  General record keeping and • Required by government and its agencies
Accounting preparation of financial reports
for the government and its
agencies. It also includes the
preparation of budgets and
accountability reports
Auditing  Expression of an opinion on • Businesses with gross quarterly revenue
the correspondence between of P150,000 are required to have their
management assertions and financial statements audited by an
established criteria. independent Certified Public Accountant
(CPA).
 The most common form of
such opinion is the
Independent auditors’ Report
which is attached to audited
financial statements
Tax Accounting  Preparation of tax returns. • All businesses are required to file tax
returns
 Providing tax advice
• Some taxpayers may require the
professional advice of a tax practitioner
regarding the management of taxes.
Cost Accounting  Analyses of costs of products • Businesses use cost accounting to
or services analyze the cost of their products or
services and the effects of those cost in,
among others, earnings and pricing
policies.
Accounting Education  Teaching of accounting, • Required by business students, business
taxation, and related courses. owners, accounting practitioners in their
Continuing professional Development
(CPD) and other interested parties.
Accounting Research  Accounting research papers, • Required by business owners,
articles and similar professional organizations and other
publications interested parties.
`
Advantages and Disadvantages
Forms of Business – Major Activities

Servicing
Merchandising
Manufacturing
Hybrid

Advantages and Disadvantages

REFERENCES

Textbooks

1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply
5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila

Online Reference

1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/

2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html

Learning Materials

1. Worksheets (teacher-made)

*** END of LESSON 1***

ACCT 1026- Financial Accounting and Reporting | 1

 ONLINE LEARNING MODULE
ACCT 1026 (Financial Accounting and Reporting)
Academic Year 2020-2021

Lesson 2: ACCOUNTING CONCEPTS and PRINCIPLES

Topic: a. Definitions
b. Basic Accounting Concepts
c. Accounting Standards
d. Conceptual Framework for Financial Reporting
e. Definition: Qualitative Characteristics of useful Financial Information
f. Fundamental Qualitative Characteristics
g. Enhancing Qualitative Characteristics

Learning Outcomes: At the end of this module, you are expected to :

1. Differentiate from each other the terms used in this topic such as
accounting concepts, principles, standards, assumptions, etc.
2. Enumerate and Explain the Basic Accounting Concepts.
3. Define and Explain Accounting Standards.
4. Know the concepts and principles that form the framework base for
preparing financial statements
5. Apply the concepts in solving accounting problems.

A person engages in business to earn profits as a means of livelihood. To attain this objective, it is necessary
for him to check from time to time if he has achieved this goal by reading the financial statements. The financial
statements are the end products of accounting that will tell a story about the solvency and liquidity of a certain
business. It is equally important for the accountant to understand the accounting procedures and principles on
how to clearly and accurately communicate financial messages to the users of financial information. Let me
emphasize on the two (2) words clearly and accurately. In the absence of clear and accurate financial
information, the accounting exercise losses its purpose which is, communication.

As future accountants of this country and the world, I hope you understand that in practice of accountancy,
garbage in and garbage out, do you understand?

Accounting plays a crucial part in business and because of this, accounting is often referred to as the
language of business.

Along this line, we are about to learn the rules of thumb in accounting. Yes, there are rules and procedures to
follow to come up with a meaningful and useful financial statements. Imagine a beauty contest with no
rules, monkeys or dogs could be winners or anybody can be a winner. Thus, this contest losses its
credibility. Just like in accounting, we follow certain rules.

Before we will go the main topics, let us start with some definition of terms to improve your understanding and
appreciation of the world of accounting.

ACCT 1026- Financial Accounting and Reporting | 2

Definition of Terms:

Accounting Concepts – are a collection of ideas representing the theoretical foundation of the accounting
discipline. It is the basis of the conceptual framework for the principles that provide a general and practical
reference for procedures and methods applicable to certain situations and problems in accounting.

Accounting Principles are a collective and coherent set of rules or doctrines that have been developed by
customs, usage, experience logic and practical necessity; and have gained general acceptance in the
accounting profession. These principles provide guidelines for recording and reporting, as well as, in the
interpretation and evaluation of financial information.

ACCT 1026- Financial Accounting and Reporting | 3

https://www.slideshare.net/jay29jay/generally-accepted-
accounting-principles-8495327

Accounting Standard – is a common set of principles and procedures that define the basis of financial
accounting. Accounting Standards improve transparency of financial reporting across all countries.
International companies follow the International Financial Reporting Standards (IFRS). The Philippines
adopted the IFRS or its local version as Philippine Financial Reporting Standards (PFRS)

Note: The full discussion on IFRS, PFRS and related topics will be elaborated in CFAS).

The terms concepts, principles, standrards postulates are often used interchangeably in practice. But the term
“standards’ specifically refer to the Philippine Financial Reporting Satbdards (PFRSs).

Traditionally, accounting standrards were referred to as the GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES (GAAP)

GAAP encompass the conventions, rules and procedures necessary to define what is accepted accounting
practice.

Basic Accounting Concepts:

1. Separate Entity Concept – the business is viewed as a separate entity from the owner. This is the most
basic concept in accounting that we account the personal transactions of the owner separately from the
business.

An example is when the owner gets money from the Cashier to pay his utility bills for his home, it is recorded
as a cash advance of the owner or regarded as Owner Drawing instead of recording it as an expense of the
business. Or another example is when the owner gets money to pay for his children’s tuition fees, is regarded
as Owner’s drawing instead of recording this as a business expense.

In other words, we put a dividing line between the business and the owner. The business, although it is
composed of the owners and its various stakeholders, we view them as separate from the other. It is like
treating the business as another person. This is with the intention of “fair presentation” of fiancial statements.
I hope we are clear on that.

https://www.slideshare.net/PoojaAdake/accounting-concept

2. Historical Cost Concept – assets are initially recorded at their acquisition cost regardless of whether
you can sell them at a higher price versus its cost immediately after its acquisition. As a rule, market values
are ignored.

3. Going Concern Assumption – the business is assumed to exist for an indefinite period of time. Under the
going concern assumption, the entity has neither the intention nor the need to enter into liquidation or to
cease operations. Hence, the financial statements are prepared based on this.

Liquidation, by the way, is the opposite of going concern and if such a condition exists, the presentation and
basis of preparing the financial statements will no longer be based on historical costs.

codaxelexyhugi.wilderenge.com

4. Matching Principle – requires that the expenses incurred during a priod be recorded in the same period
in which the related revenues are earned, associating cause and effect.

A classic example is the sales and purchase of goods and services. If we sell a product in 2020, we also
record the cost of purchasing the same product in 2020. In that manner, the revenue is properly matched with
the expense. Matching principle is based as the ‘cause and effect’ relationship.
5. Accrual Basis of Accounting – this is the more acceptable method of recording transactions as
compared to the cash basis of accounting. Under this method, Income is recorded when earned and expense
is recorded when incurred.

Let us take a look at cash basis accounting.

If you are a contractor with a project that is already completed but awaiting collection, you do not record
any income unless it is collected in cash, ‘already in the bag’.

Under accrual basis:

If you are a contractor with a project that is already completed but awaiting collection, you will recognize
the income and related expenses when the project is completed.

Is there any difference?

Yes there is. Under the cash basis, income and expense accounts maybe over or understated. If such a
case occurs, your financial statements may not present fairly the true performance of the business.

Given the two methods, accrual basis is the more acceptable practice. By the way, Philippine Taxation uses
the cash basis of accounting.

6. Prudence (or conservatism) – “Do not count your chickens until the eggs are hatched”

Are you familiar with the saying? In accounting we also practice that. In the presence of uncertainties,
provide for all possible losses/expenses and minimize the recognition of income. Or stating it in another way,
recognize revenues only when they are assured of being received.

An example is when a business is in the process of a lawsuit. It is uncertain if the business will
win or loss. In the midst of this uncertainty, under the concept of conservatisim, an amount
should be recognized in its books to provide for the possible losses.

7. Time Period – in accounting, the unlimited life of a business is divided into meaningful periods, namely:

a) Calendar Period – follows the calendar, starts its accounting cycle in January and ends in
December.

b) Fiscal Period - starts in any month except January and ends in any month except December.

A period that is less than 12 months is an interim period that can be three months or six month (semestral)

Observing time periods is necessary for the preparation of financial statements. The stakeholders will be
interested to know the performance of the business through the use of financial statements.

We do not wait for the business to stop operations to prepare the financial statements. Therefore, Financial
Statements are prepared periodically.

8. Stable Monetary Unit – in accounting, we view the Philippine peso or any other currency as a stable
currency. We do not recognize changes in purchasing power due to effects of inflation.
Hence, financial statements are prepared without regard for changes in purchasing power.
 An example, if ABC company purchases a tract of land for P250,000 in 2007. In 2012, there was political
unrest, the economy plunged into deep inflation that the value of the land if sold in 2012 will be triple its
original price. As a matter of practice, the business will not revalue its tract of land because of this.

9. Materiality Concept – When is an item material?

Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the financial statements (IASB framework)

Materiality relates to the impact or significance of transactions, balances and errors in the financial
statements. It defines a threshold or cutoff point after which financial information becomes relevant.

Materiality is a practical rule in accounting that strict compliance with GAAP is not required if the items involved
are not significant enough to affect the decision of an informed user.

.
There are two (2) factors to determine Materiality:

1) Relative size of the item in relation to the group

where the item belongs.

2) Nature of the item – an item may be material

because by its nature it affects economic
decisions

Accountingplay.com

) - The term cost / benefit constraint states the cost of providing information must be measured against the benefit derived from the use o

An example is when a bank teller cannot locate a difference of P0.10 in her transactions, the Accountant or his
superior will normally advise the Teller to declare a cash shortage/overage of the same amount instead of
incurring overtime expenses an additional cost of power and light just to locate an immaterial error of P0.10.

In other words, when we incur a cost, the expected benefit should always be higher than the related cost.

11. Full disclosure - another word for full disclosure is transparency. In accounting parlance, full disclosure
means that all significant and relevant information leading to the preparation of financial statements
shall be clearly reported.
 In other words, adequate disclosure is
best described by disclosure of any
financial facts significant enough to
influence the judgment of the informed
users of financial information. Some
disclosures are found under the Notes
to Financial Statements.

The Accountant shall disclose a

material fact known to him which is not
disclosed in the Financial Statements
but disclosure of which is necessary in
order that the statements would not be
misleading.

https://www.slideshare.net/wahidsajol/intermediatefinancial-accounting-recognition-measurement-
concepts

12. Consistency Concept – accounting policies adopted by the business should be applied in a consistent
manner from one accounting period to another period. Stated differently, like transactions must be
accounted for in the same manner from one accounting period to the other. But this does not mean that
we cannot change accounting policies. Of course, we can, provided that, a) it is required by a
standard and b) the change would result to a more relevant and more reliable information.
However, any change in accounting policy must be disclosed.

Next topic –

The Conceptual Framework for Financial Reporting

Conceptual Framework – is a summary of the terms and concepts that underlie the preparation of financial
statements. It is an attempt to provide an overall theoretical foundation for accounting which will guide
standard setters, preparers and users of financial information in the preparation of financial statements.

The conceptual framework is not a standard. It serves as a reference in developing and applying the
standards. In cases of conflict, The Philippine Financial Reporting Standards shall prevail.

The conceptual framework is concerned with general purpose financial statements. Special purpose
financial reports, computations prepared for taxation purposes are outside of the scope of the
Conceptual Framework.

Note: The topic on Conceptual Framework for Financial Reporting will be thoroughly discussed in your CFAS
subject

*** END of LESSON 2***

REFERENCES

Textbooks

1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply
5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila

Online Reference

1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/

2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html

Learning Materials

1. Worksheets (teacher-made)

UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2020-2021

ACCT 1026 (Financial Accounting and Reporting)

Lesson 3: ACCOUNTING EQUATION AND MAJOR ACCOUNTS

Topic: a. The Accounting Equation-Basic and Expanded
b. The account, the five (5) major accounts
c. Chart of Accounts, Common Account Titles

Learning Outcomes: At the end of this module, you are expected to:
1. Define accounting equation.
2. Distinguish the basic accounting equation from the expanded accounting
equation.
3. Define and give examples of account
4. Explain briefly and give examples of the five (5) major accounts
5. Describe the nature of typical account titles used in recording business
transactions
6. Apply the concepts in solving accounting problems.
ACCT 1026- Financial Accounting and Reporting | 1
What is the Accounting Equation?

An accounting transaction is a business activity or event that causes a measurable change in the accounting
equation.

The accounting equation is a basic principle of accounting and a fundamental element of the balance sheet.
The equation is as follows:

Assets = Liabilities + Equity

ACCT 1026- Financial Accounting and Reporting | 2

This equation sets the foundation of double-entry accounting and highlights the structure of the balance sheet.
Double-entry accounting is a system where every transaction affects both sides of the accounting equation.

For every change to an asset account, there must be an equal change to a related liability or equity account. It
is important to keep the accounting equation in mind when performing journal entries.

NOTE: If an entity keeps accurate records, the accounting equation will always be "in balance," meaning the
left side should always equal the right side. The balance is maintained because every business transaction
affects at least two of an entity's accounts. For example, when an entity borrows money from a bank, the
entity's assets will increase and its liabilities will increase by the same amount. When an entity purchases
inventory for cash, one asset will increase and one asset will decrease. Because there are two or more
accounts affected by every transaction, the accounting system is referred to as double-entry accounting.

The balance sheet is broken down into three major sections and their various underlying items: Assets,
Liabilities and Equity.

ASSETS- are future economic benefits controlled by an organization/entity as a result of past transactions or
other past events.

-reflect the total value of the property that the business has, and which is in its turnover. In other words, it is
what it owns.

LIABILITIES- Liabilities are future sacrifices of economic benefits that an organization is presently obliged
to make to other organizations or individuals as a result of past transactions or events.

-reflect the size of the financing of an organization’s assets by third parties, banks, and private financial
institutions. This is what the company owes.

EQUITY- represents the residual (what is left) once all fixed claims have been satisfied or simply “assets
less/minus liabilities”.

-equity characterizes the value of investments made in this organization by its owner/s
Example 1:

Juan dela Cruz started his Coffee Shop business by investing his Cash savings amounting to P 500,000.00 and
borrowed P250,000.00 from ABC Bank.

Assets= Cash P 500,000.00 (owned) Assets = Liabilities + Equity

P 500,000.00 = P 250,000.00 + P 250,000.00
Liabilities= Loan P 250,000.00 (owed)
Assets - Liabilities= Equity
Equity= Assets – Liabilities (P 250,000.00) P 500,000.00 – P 250,000.00 = P 250,000.00

Assets – Equity = Liabilities

P 500,000.00 – P 250,000.00 = P 250,000.00
THE EXPANDED ACCOUNTING EQUATION

The expanded accounting equation provides more details for the owner's equity amount shown in the basic
accounting equation. The expanded accounting equation for a sole proprietorship is: Assets = Liabilities +
Equity (Owner's Capital) + Revenues – Expenses – Owner's Draws.

The expanded accounting equation allows you to see separately (1) the impact on equity from net income
(increased by revenues, decreased by expenses), and (2) the effect of transactions with owners (draws,
dividends, sale or purchase of ownership interest).
EQUITY- is the residual interest in the assets of the entity after deducting all the liabilities (IASB Framework).

- is what the owners of an entity have invested in an enterprise. It represents what the business
owes to its owners. It is also a reflection of the capital left in the business after assets of the
entity are used to pay off any outstanding liabilities.

REVENUE- is the income generated from normal business operations and includes discounts and deductions
for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine
net income.

- If the revenues earned are a main activity of the business, they are considered to be operating
revenues. If the revenues come from a secondary activity, they are considered to be non-
operating revenues.
- Normally increases ASSETS.

EXPENSE- An expense is the cost of operations that a company incurs to generate revenue. As the popular
saying goes, “it costs money to make money.”

- There are two main categories of business expenses in accounting: operating expenses and
non- operating expenses.
- Normally decreases ASSETS.
***The difference between revenue and expenses represents profit or loss.

- If revenue is greater than expenses, the difference is profit

- If revenue is less than expenses, the difference is loss

Example 2:

Juan dela Cruz, on the first month of operating his Coffee Shop, earned a Revenue (received cash) of P
50,000.00 and incurred total expenses (paid cash) of in the amount of P 30,000.00 (Wages of
crew/staff/cashier, Supplies, Rent, Utility Expenses).

Assets= P 500,000.00

Liabilities= P 250,000.00

Equity= P 250,000.00

Revenue= P 50,000.00

Expenses= P 30,000.00

ASSETS = LIABILITIES + EQUITY + REVENUE - EXPENSES

Example 1- Juan dela Cruz started P 500,000.00 P 250,000.00 P 250,000.00 -0- -0-
his Coffee Shop business by
investing his Cash savings
amounting to P 500,000.00 and
borrowed P250,000.00 from ABC
Bank.

Example 2- Juan dela Cruz, on P 50,000.00 P 50,000.00

the first month of operating his
Coffee Shop, earned a Revenue (P 30,000.00) P 30,000.00
(received cash) of P 50,000.00
and incurred total expenses (paid
cash) of in the amount of P
30,000.00 (Wages of crew/ staff/
cashier, Supplies, Rent, Utility
Expenses).
 P 520,000.00 P 250,000.00 P 250,000.00 P 50,000.00 P 30,000.00

P 520,000.00 P 250,000.00 P 270,000.00

Next lesson, the major accounts.

Account is defined as a basic summary device in accounting. The account is also defined as a record of
increases and decreases in assets, liabilities, equity, income or revenues and expenses. Incidentally, these are
also our five major accounts and also called the elements of financial statements.

The account resembles the letter ‘T’ as it also being depicted as a T-account.

An account has three (3) parts:

1. Account Title
2. Debit
3. Credit

uble-entry bookkeeping. ... The title of the account is then entered just above the top horizontal line, while underneath debits are listed o

For better appreciation, here is a sample of entries using the T-account

https://www.pinterest.ph/pin/664562488742605626/
 www.facebook.com/Accmondeifrs/photos/ifrs-sets-a-conceptual-framework-that-serves-as-a-base-for-the-overall-
https://
recording/1205966129570997/

Classification of the Five (5) Major Accounts

The five (5) major accounts are further classified based on the financial statement where they appear:

Balance Sheet Accounts Income Statement Accounts

1. ASSETS 1. INCOME
2. LIABILITIES 2. EXPENSES
3. EQUITY

The Balance Sheet or the Statement of Financial Position is one of the components of a complete set of
financial statements. The balance sheet shows the financial position of the business as of a given period of
time.

The Income Statement is a sub-component of the Statement of Comprehensive Income, is also one of the
major components of a complete set of financial statements. It is also known as statement of Profit or Loss,
shows financial performance for a given period of time.
The F/S is thoroughly discussed in Intermediate Accounting 3.
Chart of Accounts

A chart of accounts is a list of all accounts used by the business.

Sample chart of accounts is presented below:

Notes on the Chart of Accounts:

1. It follows a certain order of presentation, such that the Assets are presented first followed by the other
balance sheet accounts and then the income statement accounts;
2. All the asset accounts are preceded by the number 1, liabilities by the number 2 and so on.
3. The chart of accounts may be accompanied with a handbook containing the account titles, their
definition and uses, a sample is presented below;
4. You can design your own chart of accounts; and formulate the account titles to be used.
 COMMON ACCOUNT TITLES USED

Balance Sheet Accounts - ASSETS

CASH Includes money or equivalent that is unrestricted . example is cahd on hand
and cash in bank
ACCOUNTS RECEIVALBE Oral or written promises to pay sums of money
ALLOWANCE FOR BAD DEBTS Estimated losses on uncollectible accounts receivable
NOTES RECEIVABLE Promises to pay supported by a promissory note
INVENTORY Goods held by the business intended for sale
PREPAID SUPPLIES Unused office and other supplies
PREPAID RENT Rent paid in advance
PREPAID INSURANCE Insurance paid in advance
BUILDING Structures owned by the business used in operations
ACCUMULATED DEPRECIATION Total amount of depreciation expenses recognized since the fixed asset
was made available for use
EQUIPMENT Consists of machineries, transportation equipment, office equipment like
table, chairs, cabinets, computer equipment like server, laptops, desktop
and furniture and fixtures

Balance Sheet Accounts - LIABILITIES

ACCOUNTS PAYABLE Obligations to pay sums of money oral or informal.
NOTES PAYABLE Obligations to pay sums of money supported by a promissory note
INTEREST PAYABLE Interest already due but not yet paid. Most common example is interest on bank
loan
SALARIES PAYABLE Already earned by employees but not yet paid as of balance sheet date
UTILITIES PAYABLE Electric, water, telephone, cable, internet already used but not yet paid
UNEARNED INCOME Income already collected but the related services will be done in the future

Balance Sheet Accounts - EQUITY

OWNER’S CAPITAL What is remaining after deducting liabilities from capital (A-L = OE)
OWNER’S DRAWING Record temporary withdrawals by the owner and it is closed to the owner’s
capital at the end of the accounting period
Income Statement Accounts - INCOME
SERVICE FEES Revenue earned after rendering services
SALES Revenue earned from selling goods
INTEREST INCOME Arises from interest bearing receivables
GAINS Income earned from the sale of assets other than Inventory.

Income Statement Accounts EXPENSES

COST OF SALES or COST OF GOODS SOLD Value of inventories sold for a certain accounting period
FREIGHT OUT or DELIVERY EXPENSE Seller’s expenses for delivering goods to customers
SALARIES EXPENSE Amounts paid to employees for services rendered
RENT EXPENSE Cost of rentals used during the accounting period
UTILITIES EXPENSE Cost of power and electricity, cable, telephone, etc. used during the
accounting period
DEPRECIATION EXPENSE A portion of the cost of a depreciable fixed asset for the accounting
period
BAD DEBTS EXPENSE or DOUBTFUL Estimated business losses arising from uncollected accounts
ACCOUNTS EXPENSE receivables
TAXES AND LICENSES Cost of local and business taxes required by the government for
operating a business. Examples are mayor’s permit, cedula, DTI
permit, percentage taxes
TRANSPORTATION and TRAVEL EXPENSES Transportation expense is within the locality like tricycle and taxi fares
while Travel expenses are incurred by employees while going
outside of the place of business like plane fares, bus fares, hotel
accommodations and food allowances while on business trip
INTEREST EXPENSE Represents the cost of borrowing money. This is the amount paid to
the banks when availing of a loan.
ADVERTISING EXPENSE Cost of promotional activities intended to increase product awareness
of the public
LOSSES Come from sale of assets other than inventory that is lesser than
book value or decreases in the value of assets due to damages
due to
natural calamities or other causes. An example of an ordinary loss is
the decrease in the market value of foreign currencies.
MISCELLANEOUS EXPENSE Small expenditures that are not required to be presented separately

*** END of LESSON 3***

 REFERENCES
Textbooks

1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply
5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila
6. Porter, G. and Norton, C. (2017), Financial Accounting- The Impact on Decision Makers: Cengage
Learning.

Online Reference
1. https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounting-equation/
2. https://bobsteelecpa.com/accounting-equation-account-types-and-the-double-entry-accounting-equation/
3. https://www.bookstime.com/what-is-the-accounting-equation
4. https://www.accountingcoach.com/blog/expanded-accounting-equation
5. https://accounting-simplified.com/equity.html
6. https://www.investopedia.com/
7. https://courses.lumenlearning.com/sac-finaccounting/chapter/the-basic-accounting-equation/

UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2020-2021

ACCT 1026- Financial Accounting and Reporting

Lessons 4: Books of Accounts and Double Entry

Topic: a. The Books of Accounts, the Journal and the Ledger
b. Double-entry system
c. Normal BalancesSystem
of Accounts
d. Rules of Debits and Credits
e. Ending Balances of Accounts
f. Contra and Adjunct Accounts

Learning Outcomes: At the end of this module, you are expected to :

1. Explain the uses and contents of the Books of Accounts and what
purpose they serve.
2. Analyze business transactions using the double entry system
3. State the role of source documents in the analyzing process
4. Apply the rules of debit and credit in analyzing business transactions

ACCT 1026- Financial Accounting and Reporting | 1

 Hi guys, this is now the 4th week of our journey together in FAR. I hope you are good, physically, mentally and
spiritually.

Do you experience information overload right now? Change the way you look at your life right now, if you want
to fulfill your dream to become a CPA into a reality. Think of all your sacrifices as your investment into your
future. Sounds good, Okay? Amen your will be done Lord!

Last week, you learned about the basic accounting equation, its uses and applications and the five major types
of accounts..

This week is devoted to books of accounts double entry system.

ACCT 1026- Financial Accounting and Reporting | 2

 The books of accounts is where we make a permanent record of our business transactions. It is a requirement
for tax audit purposes to keep a permanent file of these books.

There are two types of books:

1. The Journal-is also known as the book of original entry. It is a record of the day-to-day transaction called
journal entries that follows a chronological order (by date). The act of recording in the journal is called
“Journalizing” .

There are also different kinds of journals, depending on needs of business.

1. Special Journal which is used to record transactions of similar items come in many forms:
 Sales Journal – is used to record sales on credit terms
 Purchases Journal – is used to record purchases on account
 Cash Receipts Journal – is used to record all transactions involving receipts of cash
 Cash Disbursements Journal – is used to record all transactions involving the payments of cash

2. The General Journal is the simplest form of the journal. It is a record of all transactions that can not
be recorded in all of the other transaction journals. In the absence of special journals, the
General Journal is used to record all journal entries.

2. The Ledger – also known as the book of final entry is used to record all transactions after the journalizing
process is done. The process of transferring amounts from the journal to the ledger is called “Posting”

The General Ledger (G/L) comes in two (2) different forms.

a) General Ledger is a record of all accounts appearing in the trial balance, a sample manual
ledger is shown below:

b) Subsidiary Ledger provides a breakdown of the balances of some controlling accounts. Some
of the most common subsidiary ledgers are the Accounts Receivable,
 Accounts Payable, Fixed Assets S/L to and other S/Ls that maybe set up by
the business according to its needs.

AS you can see from the sample, the amount appearing on the General Ledger is transferred to the Subsidiary
ledger that with breakdown. The account and amount in the G/L is the controlling account. In the S/L entries
we come to know that the amount of P4,000 has 2 accounts of P2,000 each.

The Double-Entry System – Let me explain the double entry system by way of a diagram. A journal entry
always has two sides, the DEBIT and the CREDIT side. At all times, we maintain the equality of the debit and
credit. In layman’s terms, for every value that we give, we receive the same value in return. The key is give
and receive.
Stated in another way, a debit entry always has a corresponding credit entry.

https://www.asiabookkeeping.com/double-entry-system/
Understanding Normal Balances of Accounts:

Proceed to the Drills portion. (Write this in your Journal of Learning) Exercise mental honesty, hone
your mastery of the rules of debit and credit. This is where your strong basic foundation should start.

Ending Balance of an Account

Depending on the type of account, whether asset, liability or equity account, the balance is always written on
its normal balance side. It is computed as a difference between total credits and total credits.

The diagram below analyzes normal balances of accounts based on its position in the accounting equation. If
you have observed, ASSETS are on the left side of the accounting equation, so increases in assets are
recorded on the debit side and decreases on the debit side.
 Contra and Adjunct Accounts:
Contra accounts are deductions from the related account. Example: Allowance for Doubtful Accounts is a contra
account to Accounts Receivable.

Adjunct Accounts – are additions to the related account. Example: Premium on Bonds Payable is an adjunct of
Bonds Payable because it is added to the carrying amount of the Bonds.

Okay guys, we have reached the end of Week 4, be safe, be happyI

REFERENCES
Textbooks

1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply
5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila

Online Reference
1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/
2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html

Learning Materials

1. Worksheets (teacher-made)
School of Accountancy Business and Hospitality
Accountancy Department
Academic Year 2020-2021

Lessons 5: Business Transactions and their Analysis

Topic: a. The accounting cycle

b. Steps in the accounting cycle
c. Identifying and analyzing transactions and events
c.1 the source documents
d. Recording or Journalizing
e. Journal entry
e.1 Simple journal entry
e.2 Compound journal entry
ACCT 1026- Financial Accounting and Reporting | 1
 Learning Outcomes: At the end of this module, you are expected to :
1. List and explain in brief the sequential steps in the accounting cycle.
2. Outline the steps in analyzing transactions and state the role of source
documents
3. Apply the rules of debit and credit in analyzing business transactions
4. Journalize transactions in proper form

Hi guys, this is now the 5th week of our journey together in FAR. We pray to God the Father Almighty to bless
the hands working to put an end this pandemic, the COVID-19. We also invoke the presence of the Holy Spirit
for wisdom to understand our lessons so that this pandemic will not contaminate our burning desires to attain
our long-term goals and objectives. In Jesus’ most powerful name we pray, Amen.

Before the lecture proper, I would like to share a story.

Young Jan Divit came home from school with a bruised eye. When his worried mother asked what had
happened, he replied that he’d had a fight with one of his classmates. “That’s not very good, Jan,” said his
mother. “Tomorrow you will give him a chocolate and make up with him.”

The next day, the boy returned home with his other eyes bruised. “Now what?” his mother asked.

‘He wants another chocolate,” the boy replied. Source: Laughter the Best Medicine

Did I make you smile or laugh? I would be sad if you are not smiling right now, “sayang na invest ko sa
Readers Digest!!!” You see, I have collected a shelf full of reader’s digest materials, when Internet was not yet
born. Just to set a good learning mood.

ACCT 1026- Financial Accounting and Reporting | 2

 Okay, without much ado, may I present the first menu in our accounting plate, the Accounting Cycle.

The life of Man goes through a cycle; from birth to death, there are stages in between. From infancy, the toddler
years, childhood, adolescence, adulthood, middle age and senior years. So this is the human lifecycle.

In accounting, we also follow an accounting cycle, referring to a series of sequential steps and procedures
performed to accomplish the accounting process:

To put it simply:

The accounting cycle is a multi-step process designed to convert all of your company’s raw
financial information into financial statements.

In diagram form, may I present the accounting cycle:

Some authors include number 9 and 10 as part of the accounting cycle and they are:

9. Preparing the Post-closing Trial Balance

10. Recording the Reversing Entries

Note: Numbers 9-10 are optional, they are for internal control purposes only. Meaningful Financial Statements
(F/S) can still be prepared without these steps.

In short, the concept of an accounting cycle makes sure that all of the money passing through your
business is actually “accounted” for.

Lesson 6 will only include steps 1 and 2; the rest of the accounting cycle will be discussed in the coming weeks.
 Let us study the accounting cycle step by step.

1. Identifying and analyzing business transactions and documents

For me, this is the most crucial part of the process, why? Identifying will segregate accountable from
non-accountable transactions and events.

1. Accountable Event – that will be recorded in the business books as journal entries.
- will have an effect on the accounting equation: A = L + OE
- effect means an increase or decrease in the elements of the account equation

2. Non-accountable Event – not recorded in the books of accounts

- does not affect our assets, liabilities and owner’s equity
- just passing by

Example:

1. The daughter of the company President is getting married.

2. The daughter of the company President is getting married and he employees contributed P500 each to
come up with a nice wedding gift.
3. The daughter of the company President is getting married; the VP Finance approved P20,000 chargeable
against Expense: Representation and Entertainment account to purchase a wedding gift.

Just a mental exercise. Now, tell me, which one is an accountable event and which one is not. Justify your
answer/s. Write this in your JoL.
 SOURCE DOCUMENTS is an integral part of your accounting records and files.

slideshare.net/mandalina/additional-notes-on-topic-4-source-documents

In short, source documents is the starting point of the accounting process.

I would like to emphasize the following:

ess as it provides evidence that a financial transaction has occurred. During an accounting or tax audit, source documents back up the ac

Below are the common types of source documents:

1. Sales Invoice is issued by a seller evidencing the sale of goods and cash has been received in payment. It
shows the date, amount of transaction, description and quantity of the items sold, name and signature
of the buyer and some other particulars that are deemed appropriate and needed. Some sellers may
also include the phrase “received in good order” beside the signature of the buyer.

2. Official Receipt is issued for services rendered. It gives details as to date, amount, description of the
services rendered, signature of the party receiving cash and all other information deemed important.

It is noted that a Sales Invoice and an Official Receipt are both Principal evidence/proof of purchase.
The difference lies on what is being purchased — Sales Invoice is for the purchase
of goods and Official Receipt is for the purchase of services/lease of properties.
 3. Purchase Order (PO) – is issued by the buyer to a supplier indicating among other information the types
and description, quantities and agreed prices of the goods being ordered

When small businesses are just starting, they may forego a purchase order process in favor of a more informal
approach of ordering goods. But as they grow, and their purchases become more complex, a purchasing
system needs to be established that requires the issuance of a purchase order. . The purchase order (PO) is
used as internal control measure.

the shipment and delivery and the receipt of goods. A common example is that piece of paper that a courier will make you sign when deli

https://www.slideshare.net/mancnebres/source-documents-and-journalizing-process-in-a-merchandising-business

5. Bank deposit slip – with machine validation, is an evidence that a deposit has been made with the bank
stating the amount and date, breakdown of the deposit, name and signature of the teller receiving the
deposit. I have to emphasize “with machine validation” because without this, it should not be
accepted as an evidence of deposit.

Sample of a duly Validated Deposit Slip is shown below:

 6. Bank Statement – is a detailed report of deposit and withdrawal transactions with the bank for a certain
period of time issued by the bank indicating also the account’s accumulated balance, Some banks
also include a total of debits and total of credits and their average daily balance or ADB which is
useful in determining the performance of a certain account. The bank statement is being used for
reconcilement purposes.

7. Statement of Account – or a notice of billing. Common example is your utilities bills. Another one is your
school’s assessment for unpaid tuition fees. Simply stated, this is a document evidencing the
existence of unpaid account that needs to be paid or settled.

8. Credit Memorandum (CM) – issued by the seller to acknowledge the return of goods by the buyer, The CM
reduces the amount that the buyer will pay the seller at the due date.

9. Promissory Note (PN) – is a written promise to pay by the maker to pay a sum of money to the payee at a
certain future date. It may also indicate the interest rate if it is an interest-bearing note. This is PN is
received by the business from its buyers and issued by the business to its suppliers.

There are other source documents in the books. The ones mentioned above are the common documents in a
merchandising business. The bottom line is, a source document supports a journal entry.

Along with the other company records, the source documents are required to be kept by the business for a
certain period of time for audit purposes by the regulatory agencies. For instance, the Anti -Money Laundering
Council (AMLC) requires that certain documents be kept for five (5) years in active files and another five (5)
years in archive.

Very important note:

Do not record a transaction unless it is supported by a valid supporting document.

Why valid documents?

Because some sellers issue provisional receipts, or any sheet of paper not prescribed and not approved by the
BIR. These are not valid receipts.

As a guide in the analysis of transactions, it may be useful to follow the four simple steps:

 Identify the transaction from the source documents. First, determine what kind of transaction it may be. ...
Indicate the accounts, either assets, liabilities and/or owner’s equity, income or expense affected ...
Identify the proper account titles to be used and determine whether increase or decrease, debit or credit. ...
Using the rules of debit and credit, record the transaction.

https://study.com/academy/lesson/using-the-accounting-equation-analyzing-business-transactions.html
 2. Journalizing – is the recording phase of accounting. The book used in the recording process is called
the journal. I hope you still remember the different types and forms of the Journal. The simplest
form is the general journal.

Important Note: The journal along with the other books of accounts of the business should be stamped by the
Bureau of Internal Revenue at every start of the year.

A sample journal follows:

Notes on the following:

1. Journal Entries are recorded chronologically (arranged by date)

2. Amounts and account titles to be debited and credited follow the double entry system
3. The credit entries are indented a little to the right
4. Every entry is accompanied by a short description of the transaction
5. In some instances, a folio column is added to write the reference number. The
posting reference facilitates referencing between the journal and the ledger. It is used in the posting
process

Simple vs. Compound entry:

As the name suggests, a compound entry has two or more debits or credits. A simple entry has only one debit
and only one credit entry.

Your thoughts!
Why would an increase in Income be treated as an increase in Owner’s Equity?

ASSIGNMENT – Case Study

Assume that you are business owner. You have to select a business name for your own business. Identify and
analyze the transactions from the point of view of your business.
Instruction:
1. Gather/Select at least five (5) supporting documents that you can find in your household. Note: it must
be a valid source document. Clue: It could be your family’s utilities, grocery purchases, payment of
 your tuition fees, or any transaction with source documents that happened from January 2020 to the
present.
2. You can use one type or source document only once, example: there should only be one electric bill,
one telephone bill, one receipt for tuition fees etc.
3. Fill up the table below applying what you have learned in Steps 1 and 2 of the accounting cycle.

Accounts Affected Type of Account Increase or Debit or Credit

Transaction (A, L, OE) (Specific Account Title) Decrease
No.
1 1. 1. 1 1
2. 2. 2 2
2 1. 1 1 1
2. 2 2 2
3 1. 1. 1. 1.
2. 2. 2. 2.
4 1. 1. 1. 1.
2. 2. 2. 2.
5 1. 1. 1. 1.
2. 2. 2. 2.

Prepare the journal entries in prescribed format (as discussed above). Write in the heading portion, the name of your busine

Upload your answers in LMS or submit through other means (for those under the CLM) with the source documents.

END OF LESSON 5

LESSON 6 - Posting to the Ledger and Preparation of the Trial Balance

Topic: a. Definition of Posting

b. Illustrative Exercises related to Posting
c. Preparing the Unadjusted Trial Balance
d. Types of a Trial Balance
d.1 Unadjusted T/B
d.2 Adjusted T/B
d.3 Post-closing T/B
e. Errors Revealed by a Trial Balance
Learning Outcomes: At the end of this module, you are expected to :
1. Describe the General Ledger and understand what purpose it serves.
2. Post entries from the general journal to the general ledger
3. Prepare and explain the use of a trial balance
4. Perform steps in locating errors

Before we proceed with the lecture, I would like to share another story. I hope you enjoyed the first one. If
you remember the story, you will remember the lesson, promise. Here you go:

Sitting at the back of a taxi, a nun notices that the cab driver is staring at her. “I don’t want to offend
you”, he says, “but my fantasy is to be kissed by a nun.”
“Well, all right,’ says the nun. “But you have to be a practicing Catholic and single.”
 The driver says he is, so the nun plants a lingering, passionate kiss on his lips. The man momentarily
ecstatic then starts crying, “what’s the matter?” asks the nun.

“Forgive me, sister, but I have sinned. I lied to you: I’m married and I’m Jewish.”

The nun says, “Oh, that’s Ok. My name’s Jan Divit and I am off to a fancy dress party.”

Source: RD Laughter is the Best Medicine.

Are you burnout? Mainly because of COVID and secondly, your assessments? Read the quotes below . . .
again and again, if you are.. ..

Yes, the right frame of mind is called right A T T I T U D E, all caps for emphasis. If you are not yet inspired,
read the story of David and Goliath in the holy Bible........Believe you can, and you can!!!.

https://tr.pinterest.com/pin/209487820148840392/

Let us continue our study of the accounting cycle.

Steps in the Accounting Cycle:

1. Identifying and Analyzing – finished

2. Journalizing - finished
3. Posting – is the third step in the accounting cycle. It is done by transferring the data in the Journal to the
General Ledger for classification.
4. Preparing the Unadjusted Trial Balance – the fourth step in the accounting cycle aims to periodically test
the equality of the total debits and total credits in the general ledger. Normally, this is done at the
end of each month.

Posting to the General Ledger

General Ledger (GL) is the book of final entry while the Journal is the book of original entry.
 The best way to explain the purpose of the general ledger is through a diagram:

http://www.leoisaac.com/fin/fin049.htm

dentifiable physical form. Most large companies have their own system that will post transactions daily to the Journal then to the General

For companies that are still using the manual system, the standard format of the general ledger for Cash is
shown below:

http://www.leoisaac.com/fin/fin049.htm

There are three columns for recording money - Debit, Credit and Balance. There is one page in the General
Ledger for each Account, and typically the number of Accounts will be many, depending on the Chart of
Accounts.
 The manual process of posting involves transferring the date, debit and credit totals of accounts from the
General Journal to the G/L. A recorded journal entry is copied to its specific account in the GL.

Purpose: To classify the effects of business transactions according to the five (5) elements of financial
statements: Assets, Liabilities, Owner’s Equity, Income and Expense. This will greatly help the accountant to
prepare the financial statements in an orderly and timely manner.

For classroom discussion, we will be using the informal form of the G/L which is the T-account.

https://www.wallstreetmojo.com/t-accounts/

Example:

On January 02, 2020, Pedro Penduco started his locksmith business investing cash of P10,000.

Journal Entry:

DATE ACCOUNT TITLE DEBIT CREDIT

Jan 02, 2020 Cash P10,000
P. Penduco, Capital P10,000

GENERAL Ledger

CASH P. PENDUCO, CAPITAL

Dr. Cr. Dr. Cr.
2-Jan 10,000.00 10,000.00 2-Jan
Ending
Bal. 10,000.00 10,000.00
Ending Balance
The Trial Balance

https://slideplayer.com/slide/4507456/

Some Important Notes:

 Correct results of posting depend to a great extent on the correctness of the entries in the general
journal

 Errors in journalizing should be avoided as much as possible because any error in the journal entries
such as wrong amounts or wrong accounts debited and credited will lead to wrong results of posting

Trial Balance out of balance if the total debits and total credits are not equal. This is a positive proof of the
existence of one or more errors.

The chief causes of errors are:

1. Posting an item to the wrong side of the account

2. A mistake in copying when transferring a balance from the ledger account to the trial balance.
3. Omission of the posting of either a debit or credit entry in the journal.
4. Posting the same item twice
5. Wrong addition or subtraction in finding the balance of an account.

Location of Errors

The following guides may help in the prompt location of errors:

 A difference of P0.01, P0.10, P1, P100, etc. suggests that an error has been made in addition or
subtraction

 A difference of 9 or a multiple of 9 indicates transposition, that is, the order of the figures is reversed.
For example, 25 is written as 52 or 38 is written as 83.

 A difference divisible by 2 indicates an error in posting to the wrong side of the account or entering the
account balance in the wrong column of the trial balance.

 A difference divisible by 9 or 99 indicates a slide or misplacement of a decimal point. For example,

P50 is written as P5.00.
 Tip: If the trial balance is out of balance, a good plan to locate the error/s is to check the work from the
trial balance to the journal entries rather than from the journal entries to the trial balance.

END OF LESSON 6

Your thoughts!
If what is posted to the General Ledger is the record of the same transaction in the journal, why is
maintenance of the General Ledger still necessary? Don’t you think it is duplicative, time consuming
and boring?

REFERENCES

Textbooks

1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply
5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila

Online Reference

1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/

2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-
accounting/the- accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html

Learning Materials

1. Worksheets (teacher-made)