ABMBRC1: CHAPTER 2

THE RECORDING PROCESS

- It is positioned on the left in an accounting
THE ACCOUNT entry
● Credit
● An individual accounting record of increases and - An accounting entry that increases either a
decreases in a specific asset, liability, and owner’s liability or equity account. Or decreases an
equity item asset or expense account.
● Consists of three parts - It is positioned on the right in an accounting
1. Title entry
2. A left or debit side - LER (liabilities, equity (capital), revenues)
3. A right or credit side
● Because the format of an account resembles the
letter T, we refer to it as T account

Title of Account

Left or debit side Right or credit side

● NOTE: The totals of the debits and credits for any

DEBITS AND CREDITS
transaction must always equal each other so that an
accounting transaction is always said to be in
● They are commonly abbreviated as Dr. for debit and balance. Thus, the use of debits and credits in a two
Cr. for credit column transaction recording format is the most
● We use the terms debit and credit repeatedly in the essential of all controls over accounting accuracy.
recording process to describe where entries are made This is how debit and credit find their use.
in accounts
● For example, the act of entering an amount on the left
side of an account is called debiting the account. DEBITS AND CREDITS PROCEDURE
● Making an entry to the right side is crediting the
account ● each transaction must affect two or more accounts to
● an account shows a debit balance if the total of the keep the basic accounting equation in balance
debit amounts exceeds the credits ● for each transactions, debits must equal credits
● An account shows a credit balance if the credit ● the equality of debits and credits provides basis for
amounts exceed the debits the double-entry system of recording transactions

DOUBLE-ENTRY SYSTEM

● the dual (two-sided) effect of each transaction is

recorded in appropriate accounts
● provides a logical method of recording transactions
● helps ensure the accuracy of the recorded amounts
and helps to detect errors
● recorded with equal debits and credits, the sum of all
the debits to the accounts must equal the sum of all
the credits
● Every positive item in the tabular summary represents ● determining the equality of the accounting equation is
a receipt of cash, every negative amount represents a much more efficient
payment of cash
● Notice that in the account form, we record the
DR./CR. PROCEDURES FOR ASSETS AND
increases in cash as debits and the decreases in cash
as credits. LIABILITIES
● Debit
- an accounting entry that either increases an ● Asset accounts normally show debit balances
asset or expense account. Or decreases a ● Liability accounts normally show credit balances
liability or equity account.
- DEA (drawings, expenses, assets)

MADRAZO, ARABELA
 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS
● The normal balance of an account is on the side ● Withdrawals could be debited directly to owner’s
where an increase in the account is recorded. capital account, called Owner’s Drawing
● Normal Balance: ● This separate account make it easier to determine
total withdrawals for each accounting period
● Owner’s drawing is increase by debits and increased
by credits

● Normal Balance:

DR./CR. PROCEDURES FOR OWNER’S EQUITY

REVENUES AND EXPENSES
● Owner’s investments and revenues increases owner’
equity ● The purpose of earning revenue is to benefit the
● Owner’s drawings and expenses decrease owner’s owner (s) of the business
equity ● Business earns revenue = increase in owner’s equity
● The effect of debits and credits on revenue accounts
OWNER’S CAPITAL is the same as their effect on owner’s capital
● Revenue accounts are increased by credits and
● Investments by owners are credited to the Owner’s decreased by debits
Capital account ● Expenses decreases owner’s equity since expenses
● Credits increases this account, and debits decreases decrease net income
it ● The increase and decrease sides of expense
● When an owner invests cash in the business, the accounts should be the opposite of revenue account
company debits (increases) cash and credits ● Expense accounts are increased by debits and
(increases owner’s capital. decreased by credits
● When the owner’s investment in the business is
reduces, owner’s capital (decreased)

● Normal balance:
OWNER’S DRAWINGS - revenue accounts normally show credit
balances and expense accounts normally
● An owner may withdraw cash or other assets for show debit balances
personal use

MADRAZO, ARABELA
 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS

THE JOURNAL

● Companies initially record transaction in chronological

order (the order in which they occur)
● The journal is referred to as the book of original entry
● For each transaction, the journal shows the debit and
credit effects on specific accounts
● Makes several significant contributions to the
recording process:
1. It discloses in one place the complete effects
of a transaction
2. It provides a chronological record of
transactions
3. It helps to prevent or locate errors because
the debit and credit amounts for each entry
can be easily compared

GENERAL JOURNAL

● Book of original entries, which accountants and

bookkeepers record business transactions
● Most common form of journal that every company
uses
SUMMARY OF DEBIT/CREDIT RULES
● Has spaces for dates, account titles, and explanation,
reference, and two amount columns

● Journal entry is the format used to write in the journal.

Writing on the journal is called “journalizing”
● Journalizing:
- Entering transaction data in the journal
STEPS IN RECORDING PROCESS
- Companies make separate journal entries for
each transaction.
1. Analyse each transaction for the effects on the - A complete entry consists of (1) the date of
account the transaction, (2) the accounts and
2. Enter the transaction information in a journal amounts to be debited and credited, and (4)
3. Transfer the journal information to the appropriate a brief explanation of the transaction
accounts in the ledger
● The recording process begins with the transaction
● Business documents such as sales slip, a check, a bill
or a cash register tape, provide evidence of the
transactionThe company analyses this evidence to
determine the transaction’s effect on specific
accounts. The company then enters the transaction in
the journal. Finally, it transfers the journal entry in the
designated accounts in the ledger. The steps in the 1. The date of the transaction is entered in the Date
recording process occur repeatedly. column
2. The debit account title (that is, the account to be
debited) is entered first at the extreme left margin of
the column headed “Account Title and Explanation,”

MADRAZO, ARABELA
 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS
and the amount of the debit is recorded in the debit
column
3. The credit account title (that is, the account to be THE LEDGER
credited) is indented and entered on the next line in
the column headed “Account Titles and Explanation”, ● The entire group of accounts maintained by a
and the amount of the credit is recorded in the Credit company
column. ● Keeps in one place all the information about changes
4. A brief explanation of the transaction appears on the in specific account balances
line below the credit account title. A space is left ● Every company has a general ledger
between journal entries. The blank space separates ● General ledger:
individual journal entries and makes the entire journal - Contains all the assets, liabilities, and
easier to read. owner’s equity accounts
5. The column titled Ref. (which stands for Reference) is ● Companies arrange the ledger in the sequence in
left blank when the journal entry is made. This column which they present the accounts in the financial
is used later when the journal entries are transferred statements, beginning with the balance sheet
to the ledger accounts accounts
● It is important to use correct and specific account ● First in order are the asset accounts followed by
titles in journalizing. Erroneous account titles lead to liability accounts, owner’s capital, owner’s drawings,
incorrect financial statements. However, some revenues and expenses. Each account is numbered
flexibility exists initially in selecting accounting titles. for easier identification. The ledger provides the
The main criterion is that each title must appropriately balance in each of the accounts. For example, Cash
describe the content of the account. Once a company account shows the amount of cash available to meet
chooses the specific title to use, it should record current obligations. The Accounts Receivable account
under the account title all later transactions involving shows amounts due from customers. Accounts
the account. Payable shows amounts owed to creditors.

SIMPLE AND COMPOUND ENTRIES STANDARD FORM OF ACCOUNT

● The simple T-account form used in accounting

SINGLE ENTRY textbooks is often very useful for illustration purposes
● In practice, the account forms used in ledger are
● Some entries involve only two accounts, one debit much more structured.
and one credit ● Typical form using assumed data from a cash
account:
COMPOUND ENTRY

● Some transaction, require more than two account in

journalizing
● Three or more accounts
● To illustrate, assume that on July 1, Mr. Lee
purchases a delivery truck costing P140,000. He pays
P80,000 cash and agrees to pay the remaining
P60,000 on account (to be paid later). The compound ● This format is called the three-column form of
entry is as follows. account. It has three money columns – debit, credit,
● In a compound entry, the standard format requires and balance. The balance in the account is
that all debits be listed before the credits determined after each transaction. Companies use
the explanation space and reference columns to
provide special information about the transaction.

POSTING

● Transferring journal entries to the ledger account

● This phase of the recording process accumulates the
effects of journalized transactions into the individual
accounts

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 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS
● Posting involves the following steps:
1. In the ledger, in the appropriate columns of
the accounts (s) debited, enter the date,
journal page, and debit amount shown in the
journal
2. In the reference column of the journal, write
the account number to which the debit
amount was posted.
3. In the ledger, in the appropriate columns of
the accounts (s) credited, enter the date,
journal page, and credit amount shown in the
journal.
4. In the reference column of the journal, write
the account number to which the credit
amount was posted. ● You will notice there are gaps in the numbering
● Should be performed in chronological order system of the chart of accounts. Companies leave
● the company should post all the debits and credits of gaps to permit the insertion of new accounts as
one journal entry before proceeding to the next needed during the life of the business.
journal entry
● should be made on a timely basis to ensure that the THE TRIAL BALANCE
ledger is up to date
● The reference column of a ledger account indicates ● Is a list of accounts and their balances at a given time
the journal page from which the transaction was ● Companies prepare a trial balance at the end of an
posted. The explanation space of the ledger account accounting period. They list accounts in the order in
is used infrequently because an explanation already which they appear in the ledger. Debit balances
appears in the journal. appear in the left column and credit balances in the
right column
CHARTS OF ACCOUNTS ● Proves the mathematical equality of debits and credits
after posting
● The number and type of accounts differ for each ● Under the double-entry system, this equality occur
company when the sum of the debit account balances equals
● The number of accounts depends on the amount of the sum of the credit account balances
detail management desires ● The steps for preparing a trial balance are:
● For example, a management of one company may 1. List the account titles and their balances in
want a single account for all types of utility expense the appropriate debit and credit column
● Another may keep separate expense accounts for 2. Total the debit and credit columns
each type of utility, such as gas, electricity, and water 3. Prove the equality of the two columns
● Similarly, small companies will have fewer accounts ● Illustration of atrial balance of pioneer
that a corporate giant company advertising. Note that the total debits equal the
● Most companies have a chart of account total credits:
● This chart lists the accounts and the account numbers
that identify their location in the ledger. The
numbering system that identifies the accounts usually
start with the balance sheet accounts and follows with
the income statement accounts
● Shown below is an example of a Chart of
Accounts:

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 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS
● A trial balance is a necessary checkpoint for USE OF PESO SIGNS
uncovering certain types of errors. For example, if
only the debit portion of a journal entry has been
● Note that peso signs do not appear in journals and
posted, the trial balance would bring this error to light.
ledgers. Peso signs are typically used only in the trial
balance and the financial statements. Generally, a
LIMITATION OF A TRIAL BALANCE peso sign is shown only for the first item in the column
and for the total of the column. A single (a totalling
● A trial balance does not guarantee freedom from rule) is placed under the column of figures to be
recording errors. However, numerous errors may exist added or subtracted. Total amounts are
even though the trial balance column agrees. For double-underlined to indicate they are final sum
example, the trial balance may balance even when: —---------------------------------------------------------------------------------
1. A transaction is not journalized
2. A correct journal entry is not posted
3. A journal entry is posted twice ADDITIONAL INFORMATION
4. Incorrect accounts are used in journalizing or
posting or
JOURNAL ENTRY
5. Offsetting errors are made in recording the
amount of a transaction
● As long as equal debits and credits are posted, even ● Should always be “balanced:
to the wrong account or in the wrong amount, the total ● A journal entry is “balanced” if the total amount on the
debits will equal the total credits. debit side is equal to the total amount on the credit
● The trial balance does not prove that the company side.
has recorded all transactions or that the ledger is ● The last component of the Journal entry is the brief
correct. explanation of the transaction
● Step 1.
LOCATING ERRORS - Analyze the transaction and determine which
accounts are affected and the direction of the
effect.
● Errors in a trial balance generally result from ● Step 2.
mathematical mistakes, incorrect postings, or simply - Determine how to effect the direction
transcribing data incorrectly. identified in step #1 based on the normal
● What do you do if you are faced with a trial balance balances accounts
that does not balance? First, determine the amount of - If a journal entry has only one debit and one
the difference between the two columns of the trial credit, it is called SIMPLE ENTRY.
balance. After this amount is known, the following - If a journal entry has two or more debit or
steps are often helpful: credit, it is called COMPOUND ENTRY.
- If the error is P1, P10, P100 or P1,000,
re-add the trial balance columns and
ACCOUNTING CYCLE
recomputed the account balances.
- If the error is divisible by 2, scan the trial
balance to see whether a balance equal to 1. Journalizing
half the error has been entered in the wrong - This is the process of recording the business
column. transaction in the journals or book of original
- If the error is divisible by 9, retrace the entry.
account balances on the trial balance to see 2. Posting
whether they are incorrectly copied from the - Transferring the entries in the journal to the
ledger. For example, if the balance was P12 ledger
and it was listed as P: 21, a P9 error has 3. Preliminary Trial Balance
been made. Reversing the order of numbers - This is prepared to check the accuracy of
is called transposition error. posting and to prove the equality of debits
- If the error is not divisible by 2 or 9, scan the and credits
ledger to see whether an account balance in 4. Adjusting Entries
the amount of the error has been omitted - these are prepared at the end of accounting
from the trial balance and scan the journal to period to update the books
see whether a posting of that amount has 5. Worksheet
been omitted. - to facilitate the preparation of the financial
statements. This is accomplished by
showing the adjustments in the worksheet

MADRAZO, ARABELA
 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS
and then classifying all the accounts into real
accounts (balance sheet) and nominal 31 – Paid Municipal license P3,000
accounts (income statement). Worksheet is 31 – Paid salaries P14,500
optional. 31 – Partial collection of the accounts of clients P12,800
6. Financial Statements
- accounting reports prepared at the end of
Date Account Title Ref. Debit Credit
the accounting period. Income statement,
Statement of changes in owner’s equity,
Dec 1 Cash 101 200,000
Balance sheet, and Statement of cash flows Twice, Capital 301 200,000
7. Closing Entries
- accounting reports prepared at the end of Rent Expense 501 16,500
the accounting period. Income statement, 1 Cash 101 16,500
Statement of changes in owner’s equity,
Balance sheet, and Statement of cash flows Office Supplies 502 15,500
8. Post-Closing Trial Balance 1 Expense
- Only the real accounts will be shown in this Cash 101 15,500
trial balance
9. Ruling the ledger Office Equipment 104 80,000
- Getting the total debits and credits of all the 1 Cash 101 40,000
account and then double ruling or double Note Payable 202 40,000
lining the totals
10. Opening Entry 2 Furniture and Fixture 104 12,500
Cash 101 12,500
- Basis is the post-closing trial balance
11. Reversing Entries
2 Cash 101 5,500
- Some adjusting entries prepared at the end
Service Revenue 401 5,500
of accounting period which need to be
reversed at the start of the new accounting 3 Light and Water 503 4,000
period Expense
Cash 101 4,000
ACCOUNTING CYCLE - EXAMPLE
4 Accounts Receivable 102 38,000
Business Transactions: Service Revenue 401 38,000

8 Cash 101 20,000

Dec 1 – Twice invested P200,000 of cash as initial investment.
Loan Payable 203 20,000
1 – Paid Office Rent, P16,500
10 Notes Receivable 103 12,000
1 – Bought Office Supplies for cash P15,500 Service Revenue 401 12,000
1 – Bought computer from JYP P80,000, paying 50% as down
payment and the balance is payable in 90-days 15 Cash 504 16,500
Salaries Expense 101 16,500
2 – Office tables and chairs were purchased for cash, P12,500
2 – Received cash from Got7 for services rendered P5,500 15 Cash 302 10,000
Twice, Drawing 101 10,000
3 – Paid electricity and water bill, P4,000
18 Furniture and Fixture 104 15,000
4 – Billed several clients for service rendered P38,000 Accounts Payable 201 15,000

8 – Borrowed money from BDO bank, P20,000 20 Office Equipment 105 32,000
Note Payable 202 32,000
10 – Receive a 60-day note from a client for service rendered,
P12,000 31 Cash 505 3,000
Tax and License 3,000
Expense 101
15 – Paid salaries P16,500
15 – Twice withdraw P10,000 cash for personal use
31 Cash 504 14,500
Salaries Expense 101 14,500
18 – Bought cabinets from YG P15,000 on credit
31 Cash 101 12,000
20 – Issued a promissory note to SM corp P32,000 for printing Accounts Receivable 102 12,000
machine

MADRAZO, ARABELA
 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS

GENERAL LEDGER

MADRAZO, ARABELA
 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS

PRELIMINARY TRIAL BALANCE ADJUSTED TRIAL BALANCE

Twice Printing Shop

Adjusted Trial Balance
December 31, 200X

Accounts Debit Credit

Cash 105,500

Accounts Receivable 25,500

Bad Debts 500

Note Receivable 12,000

Interest Receivable 1,000

Furniture and Fixture 27,500

Depreciation - Furniture 1,200

and Fixture
ADJUSTING ENTRIES
Office Equipment 112,000

Depreciation – Office 11,200

Equipment

Unused Supplies 8,500

Allowance for Bad Debts 500

Account Payable 15,000

Note Payable 72,000

Interest Payable 2,000

Loan Payable 20,000

Twice Capital 200,000

Twice Drawing 10,000

Service Revenue 55,500

Interest Revenue 1,000

Accumulated 1,200
Depreciation - Furniture
and Fixture

Accumulated 11,200
Depreciation - Office
Equipment

Rent Expense 16,500

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 ABMBRC1: CHAPTER 2
THE RECORDING PROCESS
Office Supplies Expense 7,000
BALANCE SHEET
Light and Water Expense 4,000
Twice Printing Shop
Salaries Expense 31,000 Balance Sheet
December 31, 200X
Interest Expense 2,000

Taxes and License 3,000

Expense

TOTALS: 378,400 378,400

INCOME STATEMENT

Twice Printing Shop

Income Statement
December 31, 200X

CLOSING ENTRY

STATEMENT OF CHANGES IN OWNER’S EQUITY

Twice Printing Shop

Statement of Owner’s Equity
December 31, 200X

MADRAZO, ARABELA