Lesson 4

Journalizing Business Transactions

Topics:
❖ Accounting process and accounting cycle
❖ Books of Accounts
❖ Recording Process – Journalizing business transactions

Learning Objectives
❖ Analyze common business transaction using the rules of debit and credit.
❖ Journalize simple problems and exercises in analyzing business transactions.
❖ Discuss the uses of the books of account.
❖ Prepare the format of a general journal.
❖ Prepare the format of a general ledger.

In the previous lesson, we analyzed the dual aspect of every business transactions using the
rules of debit and credit. Also, we have identified the various account titles which comprises
the five major accounts that forms the financial statements. In this module, we are going to
take up the steps in the accounting process, focus on the analysis of business transactions
and preparation of journal entries.

Accounting Process

Before an entity can prepare the financial statements, business transactions have to be
analyzed, recorded, classified and summarized. The accounting process refers to the
different activities performed in order to produce the financial statements. This process
continues to repeat each accounting period; it is commonly referred to as the accounting
cycle. (Salosagcol, 2018)

1 - Analyzing and Journalizing Transactions

↓
2 - Posting to the Ledger
↓
3 - Preparing the Trial Balance
↓
4 - Preparing Adjusting Entries
↓
5 - Preparing Financial Statements
↓
6 - Preparing Closing Entries
↓
7 - Preparing the Post-Closing Trial Balance
↓
8 - Preparing the Reversing Entries
The steps in the accounting process can be classified whether these are analytical or
procedural in nature. This classification allows the preparer to direct attention to those
matters that are of greater importance in the accounting process.

Analytical Steps

It involves the recording of the transactions in the journal and the preparation of adjusting
entries. These steps are described as analytical in nature because the preparer must use
his professional judgment to identify which transactions to record and how they will be
recorded.

Procedural Steps

Other steps in the cycle not stated in the aforementioned are considered procedural in
nature and does not require analytical skills. The procedures performed in classifying and
summarizing the transactions do not normally require significant application of professional
judgment.

Books of Account

The records that are used and kept by the business in storing all of the accounting data are
called books of accounts. These books are with ready or prepared format to fit in the need of
the business and also to provide convenience for the preparer in communicating to various
users through the financial statements. (Lopez, 2016)

There are two sets of books that are used by the business:

Journal – The book of original entry. It is in this book where transactions are recorded for the
first time. There are two kinds of journal namely general journal and special journal.

Ledger – The book of final entry. It is in this book where transactions that were recorded in
the journal are transferred for final recording.

A general journal has columns that show details of the transaction:

1. The date column – shows the date when the transaction took place.
2. Particulars – shows the item or the accounts debited and credited as a result of a
transaction analysis as well as a brief or concise explanation of what the transaction
is about.
3. A folio (f) column – shows the number of an account in a ledger or page of a ledger to
which it was transferred.
4. Debit and Credit columns – shows the value received and value given up
respectively.
An example of a general journal can be like this:
Page No.
Year Particulars F Debit Credit
Month Day Debit Item XX
Credit Item XX
Brief Explanation

A general ledger has columns that show details of the transaction:

1. The date column – shows the date when the transaction took place as recorded in
the journal.
2. Particulars – shows a brief or concise explanation of what the transaction as shown
in the journal.
3. A folio (f) column – shows the page number of a journal where entries are taken
from.
4. Debit and Credit columns – shows the amount of the transactions as indicated in the
journal.

An example of a general ledger can be like this:

Page No.
Year Particulars F Debit Year Particulars F Credit
Month Day Month Day

Recording Process

Recording is the first phase of accounting. This involves the writing down of business
transactions in a systematic manner and in order of their occurrence in the journal.

Journalizing – it is the act of recording business transactions in the journal. The entry that is
being made in the journal is called journal entry. A journal entry may be simple or
compound.
A simple journal entry consists one debit item and one credit item.

Ex. January 01 Cash on Hand ₱100,000

Leonel, Capital ₱100,000
To record Mr. Leonel’s investment.

Note that the journal entry only consists of one debit item and one credit item.

A compound journal is one that may have one debit item and two or more credit item; two or
more debit item and one credit item; or may have two or more items in both sides.

Ex. January 01 Cash on Hand ₱40,000

Equipment 60,000
Leonel, Capital ₱100,000
To record Mr. Leonel’s investment.

or

January 01 Cash on Hand ₱100,000

Loans Payable ₱40,000
Leonel, Capital 60,000
To record borrowings and Mr. Leonel’s
investment.

or

January 01 Cash on Hand ₱40,000

Equipment 60,000
Loans Payable ₱40,000
Leonel, Capital 60,000
To record borrowings and Mr. Leonel’s
investment.

Note: The journal entry must include:

1. The date of the transaction
2. The accounts affected by the transaction
3. The amounts of debit and credit
4. A brief explanation of the transaction

Opening Entry

The first entry made in the general journal is called an opening entry. This constitute either
the recording of the initial investments of the owner or the recording of the beginning
balances of accounts in preparation for the next annual accounting period.
Chart of Accounts

When transactions are recorded in the general journal, account titles are being used. A list
of account titles is prepared beforehand to guide the preparer of what specific account titles
are to be used in describing the exchanges of values in a transaction.

Before we proceed with journalizing, do not forget our discussion in module 3 about the
effects of the transactions when an account is debited or credited.

5 Elements Normal balance Debited Credited

Asset Debit ↑ ↓
Liability Credit ↓ ↑
Owner's Equity Credit ↓ ↑
Income Credit ↓ ↑
Expense Debit ↑ ↓

The following are sample transactions that would help us further understand and apply the
journalizing process:

1. On March 01, Mr. Loyola, the proprietor, started his business by investing ₱25,000 cash.

March 01 Cash ₱25,000

Loyola, Capital ₱25,000
To record Mr. Loyola’s initial investment.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↑
25,000 = ↑ 25,000

2. On March 05, Mr. Loyola contributed his computer worth ₱50,000 into the business.

March 05 Office Equipment ₱50,000

Loyola, Capital ₱50,000
To record the additional investment
of Mr. Loyola.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↑
50,000 = ↑ 50,000
3. On March 08, the entity borrowed ₱30,000 from a bank.

March 08 Cash ₱30,000

Loans Payable ₱30,000
To record the receipt of bank loan.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↑
30,000 = ↑ 30,000

4. On March 10, the entity bought tables and chairs worth ₱8,000.

March 10 Furniture and Fixtures ₱8,000

Cash ₱8,000
To record the purchase of furniture for cash.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↑ 8,000 =
↓ 8,000 =

5. On March 12, the entity purchased bond papers, pencils and folders for office use
amounting to ₱2,000.

March 12 Office Supplies ₱2,000

Cash ₱2,000
To record the purchase of supplies for cash.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↑ 2,000 =
↓ 2,000 =

6. On March 15 the entity purchased stationaries and envelopes from Art Depot payable at
the end of the month. The total amount purchased is ₱5,000.

March 15 Office Supplies ₱5,000

Accounts Payable ₱5,000
To record the purchase of supplies on account.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↑ 5,000 = ↑ 5,000

7. On March 18 the business received ₱50,000 from a customer for the services
rendered.

March 18 Cash ₱50,000

Service Income ₱50,000
To record the receipt of cash
from customer for services.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↑
50,000 = ↑ 50,000

8. On March 20, salaries of ₱20,000 were paid to employees.

March 20 Salaries Expense ₱20,000

Cash ₱20,000
To record payment of salaries
to employees.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↓
20,000 = ↑ 20,000

9. On March 24, utilities including water and electricity was paid for ₱10,000.

March 24 Utilities Expense ₱10,000

Cash ₱10,000
To record payment of utilities
for the period.
Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↓
10,000 = ↑ 10,000

10. On March 30, paid our accounts with Art Depot, ₱5,000.

March 30 Accounts Payable ₱5,000

Cash ₱5,000
To record payment of our accounts.

Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↓ 5,000 = ↓ 5,000

11. On March 31, Mr. Loyola withdrew ₱10,000 cash for his personal use.

March 31 Loyola, Drawings ₱10,000

Cash ₱10,000
To record the withdrawal made by Mr. Loyola.

Analysis:

Asset = Liabilities + Owner's Equity + Income - Expenses

↓
10,000 = ↓ 10,000
The summary of all the transactions are presented below:

Asset = Liabilities + Owner's Equity + Income - Expenses

1 ↑ 25,000 = ↑ 25,000
2 ↑ 50,000 = ↑ 50,000
3 ↑ 30,000 = ↑ 30,000
↑ 8,000 =
4
↓ 8,000 =
↑ 2,000 =
5
↓ 2,000 =
6 ↑ 5,000 = ↑ 5,000
7 ↑ 50,000 = ↑ 50,000
↓ = ↑ 20,000
8
20,000
↓ = ↑ 10,000
9
10,000
10 ↓ 5,000 = ↓ 5,000
↓
11
10,000 = ↓ 10,000
Total 115,000 = 30,000 + 65,000 + 50,000 - 30,000

Review Questions

1. What are the two sets of books that are used and kept by the business?
2. Why is a journal referred to as book of original entry?
3. Why is a ledger referred to as book of final entry?
4. What is the difference between a simple journal entry from a compound journal
entry?
5. What is the purpose of a chart of account?