HANDOUT IN ANA – CHAPTER 3 – The Accounting Cycle of a

Business Entity (Part 1)

LESSON 1 – JOURNALIZING BUSINESS TRANSACTIONS
LESSON 2 - POSTING TO THE LEDGER
LESSON 3 – TRIAL BALANCE PREPARATION

LEARNING OBJECTIVES

At the end of this chapter, you are expected to:

1. prepare journal entries for a service entity applying the rules of debit and credit;
2. define and give the components of a chart of accounts;
3. post in the general ledger the journal entries prepared for the given service
entity; and
4. prepare a trial balance for the given service entity.

Lesson 1 – JOURNALIZING OF BUSINESS TRANSACTIONS

What is journalizing?

JOURNALIZING is the act of recording business transactions in the Journal. It is the

first step in the accounting process and shows the debit and credit amounts. The entry
that is made in the journal is called JOURNAL ENTRY. A Journal Entry may be SIMPLE or
COMPOUND.
A simple journal entry is one that has one debit item with a debit amount and one
credit item with a credit amount.
Shown below is a formation of a simple journal entry.

Page No. ________

Year Particulars F Debit Credit
Month Day Debit Item xx
Credit Item xx

A compound journal entry is one that may have one debit item and two or more
credit items; two or more debit items and one credit item; or may have two or more items on
both sides.
Shown below is a formation of a compound journal entry with two debit and credit
items.
Page No. _______
Year Particulars F Debit Credit
Month Day Debit Item xx
Debit Item xx
Credit Item xx
Credit Item xx
Explanation of the
nature of transaction.

1
PROCEDURES IN FILLING-UP A GENERAL JOURNAL

1. The Date Column is divided into two sub-columns. Enter in the first sub-column, the
amount, and the year. The year is written in small figures about the month in the same
space as the first line. In each leaf of a journal, the year and the month is written on the
front page but not repeated on the back page. Enter in the second sub-column the date
when transactions occurred.

2. The Particulars Column – after analyzing a transaction and the value received and the
value parted have already been determined, record this transaction in a form of a Journal
Entry. Enter the debit item first in the same line (first line) with the transaction date and
the corresponding peso amount in the debit money column. The credit item is indented
with a reasonable distance from the column of the debit item. The amount of the debit
must equal with the amount of the credit. In the case of a compound journal entry, debit
items are entered in a block form in case of two or more items are credited.

A complete journal entry should have an explanation. The explanation must state
briefly but concisely the nature of transaction. The first word of the explanation should
be indented with a reasonable distance from the first letter of the account or item
credited. It is usually worded “To record…”

To illustrate:
The transaction is…
“Bought a car on account, P800,000”.
The explanation would be, “To record car bought on account.”
Some bookkeepers and accountants prefer to cut short the explanation by
eliminating the words “To record” instead, “Bought a car on account” to economize
the space of the journal which becomes widely acceptable.

3. Leave a vacant space before recording the next transaction. Write only the date in
the second sub-column of the date column and the same procedure is followed.

Remember the following indentions made in preparing the Journal Entry:

1. The credit items are indented from the debit item;
2. The first word of the explanation is indented from the credit item.

Take note of how peso amounts were written in both debit and credit money columns:
1. The money columns of the Journal provide the segregation of digits for the millions,
thousands, hundreds, pesos, and centavos. These results in the following
observations:
a) The use of comma for million and thousands and the decimal point for the centavos
are eliminated;
b) The use of peso (P) is also eliminated because the debit and credit columns are
understood to be money columns and that peso is used as its valuation;
c) The use of the “dash” (-) indicates that there are no centavos in the amount. The
“double-zero” may also be used.

However, under the computerized accounting system, there are no restrictions as

the placing of comma for the thousands/millions and the decimal points for the centavos
when we type/encode the amount in the journals because of its improvised format.

AN OPENING ENTRY

2
 The first entry made in the general journal is called an Opening Entry. This
constitutes either the recording of the initial investments of a proprietor who is engaged in
the business for the first time or the recording of the beginning balances of accounts in
preparation for the next annual accounting period.

The opening entry is illustrated on page 4 where the initial investments of Mr. Severo
Santos were recorded on March 1, 2021, the date he started his business. The opening entry
made for the next annual accounting period will be discussed in the succeeding chapter.

CHART OF ACCOUNTS
What is a 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 bookkeeper and accountant of what
specific titles are to be used in describing the exchanges of values in a transaction. This list
of account titles is called Chart of Accounts.
Shown below is the chart of accounts of DAVAO LAUNDRY SERVICES, a laundry
business that is owned and managed by Mr. Severo Santos.

DAVAO LAUNDRY SERVICES

CHART OF ACCOUNTS

Assets Revenue/Income

Page Account Page Account

No. No. No. No.

1 111 Cash in Bank 13 441 Laundry Income

2 112 Accounts Receivable
3 112-A Estimated Uncollectible
Accounts Expenses
4 113 Laundry Supplies Inventory
5 114 Laundry Equipment Page Account
6 114-A Accu. Depreciation No. No.

Liabilities 14 551 Uncollectible Accounts

15 552 Depreciation Expense
Page Account 16 553 Salaries Expense
No. No. 17 554 Rent Expense
18 555 Rent Expense
7 221 Notes Payable 19 556 Utilities Expense
8 222 Accounts Payable 20 557 Taxes and Licenses
9 223 Accrued Advertising 21 558 Advertising Expense
22 559 Interest Expense
Owner’s Equity

Page Account
No. No.

10 331 S. Santos, Capital

11 332 S. Santos, Drawing
12 333 Income & Expense Summary

The Chart of Accounts shows account titles which are arranged in this order:
ASSETS, LIABILITIES, OWNER’S EQUITY, REVENUE and EXPENSES (ALORE). If a
transaction involves an account title which is not included in a given chart, the bookkeeper

3
may create an account title that he thinks is more appropriate to use in describing the
exchanges of values.
Illustrative Problem: Davao Laundry Services (Complete Accounting Process for Service
Concern)

Investment by Owner

March 1 - Mr. Severo Santos opens a current account with Allied Banking Corporation in the
amount of P850,000 to start with his laundry shop business under the trade name
Davao Laundry Services.

(At this point, an entity, Davao Laundry Services was created separate and
distinct from the owner, Mr. Santos)

Analysis: There is an increase in Asset - Cash in Bank, of P850,000 and a corresponding

increase in Owner’s Equity, Santos, Capital of P850,000.

Rule: Debit, increase in Asset and Credit, increase in Owner’s Equity.

Journal Entry
March 1 - Cash in Bank - 850,000
Santos, Capital - 850,000
Initial Investment by the owner.

Purchase of Supplies on Credit

March 2 - Purchased laundry supplies on account, P90,000 from the following suppliers:
SM City – Davao - 35,000
Gaisano Mall - 25,000
NCCC Mall - 30,000
Total Payable - 90,000

Analysis: There is an increase in Asset - Laundry Supplies Inventory of P90,000 and a

corresponding increase in Liability - Accounts Payable of P90,000.

Rule: Debit, increase in Asset and Credit, increase in Liability.

Journal Entry
March 2 - Laundry Supplies Inventory - 90,000
Accounts Payable - 90,000
Purchased laundry supplies on credit.

Purchase of Equipment for Cash

March 3 - Purchased laundry machines for cash, P150,000.

Analysis: There is an increase in one form of an Asset - Laundry Equipment, of 150,000

and a corresponding decrease in another form of an Asset - Cash in Bank of
150,000.

Rule: Debit, increase in Asset and Credit, decrease in Asset.

Journal Entry
March 3 - Laundry Equipment - 150,000
Cash in Bank - 150,000
4
 Purchased laundry machines for cash.
Services Rendered for Credit
March 4 - Rendered laundry services on account for P80,000 to the following customers:
Apo View Hotel - 5,000
Grand Men Seng Hotel - 35,000
The Marco Polo Hotel - 30,000
Royal Mandaya Hotel - 10,000
Total Receivable - 80,000

Analysis: There is an increase in Asset - Account Receivable, of P80,000 and a

corresponding increase in Income of P80,000.
Rule: Debit, increase in Asset and Credit, income.
Journal Entry
March 4 - Accounts Receivable - 80,000
Laundry Income - 80,000
Services rendered on credit.

Payment of Taxes, Licenses and Other Government Dues

March 10 - Paid taxes and licenses due to government, P4,000.

Analysis: There is an increase in Expense – Taxes and Licenses of P4,000 and a

decrease in Asset - Cash in Bank of P4,000.
Rule: Debit, increase in Expense and Credit, decrease in Asset.
Journal Entry
March 10 - Taxes and Licenses - 4,000
Cash in Bank - 4,000
Paid taxes and licenses.

Withdrawal by Owner

March 12 - Mr. Santos withdrew P10,000 cash from the business for his personal use.

Analysis: There is a decrease in Owner’s Equity – Santos, Drawing, of P10,000 and a

corresponding decrease in Asset - Cash in Bank of P10,000.

Rule: Debit, decrease in Owner’s Equity - Drawing and Credit, decrease in Asset.

Journal Entry
March 12 - S. Santos, Drawing - 10,000
Cash in Bank - 10,000
Withdrawal made by the owner.

Issuance of a Note for Borrowed Money

March 17 - The business borrowed money from Allied Banking Corporation, P100,000
and issued a 15-day note. It was deposited to the account of Davao Laundry
Services by way of a credit memorandum issued by the bank.

5
Analysis: There is an increase in Asset - Cash in Bank of P100,000 and a corresponding
increase in Liability - Notes Payable of P100,000.
Rule: Debit, increase in Asset and Credit, increase in Liability.
Journal Entry
March 17 - Cash in Bank - 100,000
Notes Payable - 100,000
Issued a 15-day note for borrowed money.

Payment of Interest on Bank Loan

March 17 - The bank issued a debit memorandum, P1,000 for interest and bank
charges.

Analysis: There is an increase in Expense – Interest Expense of P1,000 and a

corresponding decrease in Asset - Cash in Bank of P1,000.

Rule: Debit, increase in Expense and Credit, decrease in Asset.

Journal Entry
March 17 - Interest Expense - 1,000
Cash in Bank - 1,000
Bank interest payment.

Partial Collection of Accounts Receivable

March 21 - Received cash of P45,000 representing collection from the following

customers’ account:
Grand Men Seng Hotel - 30,000
The Marco Polo Hotel - 10,000
Royal Mandaya Hotel - 5,000
Total Collection - 45,000

Analysis: There is an increase in one form of an Asset - Cash in Bank, of P45,000 and a
decrease in another form of an Asset - Account Receivable of P45,000.

Rule: Debit, increase in Asset and Credit, decrease in Asset.

Journal Entry
March 21 - Cash in Bank - 45,000
Accounts Receivable - 45,000
Partial collection of accounts.

Partial Payment of Accounts Payable

March 25 - Partial payment of accounts, P60,000 to the following suppliers:

SM City – Davao - 25,000
Gaisano Mall - 20,000
NCCC Mall - 15,000
Total Payment - P60,000
6
Analysis: There is a decrease in Liability - Accounts Payable of P60,000 and a
corresponding decrease in Asset - Cash in Bank of P60,000.
Rule: Debit, decrease in Liability and Credit, decrease in Asset.
Journal Entry
March 25 - Accounts Payable - 60,000
Cash in Bank - 60,000
Partial payment of accounts.

Hiring of an Accountant/Manager

March 30 - Mr. Severo Santos hired an accountant/manager for his business as he

has plenty of things to attend to at P16,000 per month effective April 1, 2021.

(No entry is necessary because the transaction has no money value.)

Payment of Expenses

March 30 - The following expenses were paid by Davao Laundry Services for the
month of March 2021:
Space Rental - 5,000
Telephone, light & water - 12,000
Salaries of Employees (contractual) 10,000
Total Expenses Paid - 27,000

Analysis: There is an increase in various Expenses of P27,000 and a decrease in Asset -

Cash in Bank of P27,000.
Rule: Debit, increase in Expense and Credit, decrease in Asset.
Journal Entry
March 30 - Rent Expense - 5,000
Utilities Expense - 12,000
Salaries Expense - 10,000
Cash in Bank - P27,000
Payment for expenses incurred during the month.

End of the one month transaction.

(The foregoing transactions are recorded in the General Journal below)

GENERAL JOURNAL
Foli
2021 Particulars Debit Credit
o
850,00
March 1 Cash in Bank
0
S. Santos, Capital 850,00
7
 0
Initial Investment.

2 Laundry Supplies 90,000

Accounts Payable 90,000
Laundry supplies on credit.

150,00
3 Laundry Equipment
0
150,00
Cash in Bank
0
Purchased laundry equipment for
cash.

4 Accounts Receivable 80,000

Laundry Income 80,000
Services on credit.

10 Taxes & Licenses 4,000

Cash in Bank 4,000
Paid taxes and licenses.

12 S. Santos, Drawing 10,000

Cash in Bank 10,000
Withdrawal by owner.

100,00
17 Cash in Bank
0
100,00
Notes Payable
0
Issued a 15-day note for borrowed
money.

17 Interest Expense 1,000

Cash in Bank 1,000
Bank interest payment.

21 Cash in Bank 45,000

Accounts Receivable 45,000
Partial collection of accounts.

25 Accounts Payable 60,000

Cash in Bank 60,000
Partial payment of accounts.

30 Rent Expense 5,000

Utilities Expense 12,000
Salary Expense 10,000
Cash in Bank 27,000
Payment of expenses.

(space for Adjusting Entries)

Lesson 2 – POSTING TO THE LEDGER

After the transaction has been recorded in the Journal (General Journal), the entries in
the Journal will then be transferred to another book called “Ledger” or General Ledger for
8
final recording. The process of transferring entries from the journal to the ledger is what we
call “Posting” which is the second step in the accounting process.
Posting simply means updating the ledger accounts due to the effect of
transactions recorded in the journal.
The transfer of entries from the Journal to the Ledger is actually the sorting process
which means putting each value in a certain place according to its kind, class or nature. This
refers to “Classifying”, which is the second phase of accounting.
A General Ledger has two sides; the left-hand side is called the debit side and the
right-hand side is called the credit side. Each side has the column for the following:
DATE COLUMN – shows the date of the transactions that occurred as recorded in the
Journal;
PARTICULARS – shows a brief but concise explanation of the transaction as shown in
the Journal. This is sometimes called Explanation, Description or Item.
FOLIO (F) – shows the page number of a Journal where entries are taken from. It
means the reference for the journal entry.
MONEY COLUMNS – the debit money column shows the amounts that are transferred
from the debit money column of the General Journal while the credit money column
shows the amounts that are transferred from the credit money column of the General
Journal.

Shown below is a page of a GENERAL LEDGER:

a) to be used under manual accounting system.

Page No. _____

Year Particulars F Debit Year Particulars F Credit
Da Month
Month Day
y

b) to be used under computer-based accounting system.

Page No. ________

Year Particulars F Debit Credit Balance
Da
Month
y

At the end of an accounting period, the debit and credit entries of each item or
account in the ledger are totaled. If the total of the debit side is bigger than the total of the
credit side, the difference in amount is called DEBIT BALANCE. We then say that the
account is a debit balance. On the other hand, if the total of the credit side is bigger than the
total of the debit side, the difference in amount is called CREDIT BALANCE. We then say
that the account is a credit balance. If both totals of debit and credit sides are equal, the
account is said to be IN-BALANCE or CLOSED ACCOUNT.
In manual accounting systems, this can be a tedious and time-consuming process; but
in computer based-systems, it is usually done instantly and automatically. In addition,
computerized posting greatly reduces the risk of errors.

PROCEDURES IN POSTING JOURNAL ENTRIES TO THE LEDGER (Under Manual

Accounting System)
9
 Remember, each item or account is provided with a Ledger. The account in the Ledger
are arranged and placed with an account or page number according to the sequence of the
listing of account titles in the Chart of Accounts (Assets, Liabilities, Owner’s Equity, Income
and Expenses).
Using our illustrative problem, the DAVAO LAUNDRY SERVICES, the following are
the steps in posting the journal entries to the General Ledger.

1st step
As the first account in the General Journal entry is “Cash in Bank”, turn the
ledger to the page where the account “Cash in Bank” is located.

2nd step
In the ledger of the account “Cash in Bank”, enter in the date column at the
left side (debit) of the said ledger the date when transaction occurred as
shown in the journal;

3rd step
In the “particular” column of the ledger, state briefly the nature of the
transaction, how cash existed in the record.

4th step
In the “folio” column of the ledger, write down the page of the journal where
the account “Cash in Bank” entry was taken from and simultaneously, write
down in the “folio” column of the journal the account or page number
assigned to the account “Cash in Bank”. This is called “cross-referencing” or
“cross-indexing”.

5th step
Enter in the debit money column of the ledger “Cash in Bank” the amount
and the same procedure is followed in posting the next account and
subsequent journal entries.

The posting procedures as illustrated below show the entries in the General Journal of
March 1, 2021 and posting of the accounts involved in the transactions to their respective
ledger accounts. The General Ledger accounts are assigned with a page number instead of
using an account number for convenience purposes in using the folio.

GENERAL JOURNAL
Page No. 1
2021 Particulars F Debit Credit
March 1 Cash in Bank GL-1 850,000
S. Santos, Capital GL-10 850,000
Initial Investment

10
 GENERAL LEDGER

Cash in Bank
Page No. 1
2021 Particulars F Debit 2021 Particulars F Credit
March 1 GJ-1 850,000

S. Santos, Capital
Page No. 10
2021 Particulars F Debit 2021 Particulars F Credit
March 1 GJ-1 850,000

FOOTING THE LEDGER

After posting the journal entries to the ledger, the amounts of debit and credit are
being totaled and usually done at the end of each month. This is called “footing”.
FOOTING is the process of adding each of the two amount columns of an account or
item in the general ledger and finding their balances.
In footing the account, a well-sharpened pencil should be used in writing the total of
the amount and the account balance. If an account is a debit balance (debit total is bigger
than the credit total), the amount of difference is placed on the “particular” column of the
debit side.
If the account, on the other hand is a credit balance (credit total is bigger than the
debit total), the amount of difference is placed on the “particular” column of the credit side.
If there is only one entry in any side of an account in the ledger, no footing is done and the
entry is left “as is”.
Footing is merely the total of the column and if error is committed, it may be erased
and corrected easily because pencil was being used. Footing is not considered an entry
posted in the general ledger.
In computer-based systems wherein a three-money column ledger is used, footing is
no longer necessary because the account maintains a running balance.

Let us illustrate the account “Cash in Bank” using the three-money column ledger:

Page No. ______

2021 Particulars F Debit Credit Balance
March 1 Investment GJ-1 850,000 850,000
3 Laundry Equipment GJ-1 150,000 700,000
10 Taxes and Licenses GJ-1 4,000 696,000

11
 12 Withdrawal GJ-1 10,000 686,000
17 Bank Loan GJ-1 100,000 786,000
17 Interest Payment GJ-1 1,000 785,000
21 Partial Collection GJ-1 45,000 830,000
25 Partial Payment GJ-1 60,000 770,000
30 Various Expenses GJ-1 27,000 743,000

Shown below is the filled-up General Ledger of DAVAO LAUNDRY SERVICES, (under
manual accounting system) showing posting and footing of each account. Only the
“Particulars” column of the account “Cash in Bank” is filled-up in the proper manner for
illustration and guide purposes.

GENERAL LEDGER

ASSETS

Cash in Bank Page No.

1

Particular 2021 Particular

2021 F Debit F Credit
s s
Investmen GJ-1 850,00 March Laundry GJ-1 150,00
March 1 3
t 0 Equipment 0
17 Bank Loan GJ-1 100,00 10 Taxes and GJ-1 4,000
0 Licenses
21 Partial GJ-1 45,000 12 Withdrawal GJ-1 10,000
Collection
17 Interest GJ-1 1,000
Payment
25 Partial GJ-1 60,000
Payment
30 Various GJ-1 27,000
Expenses
995,00 252,00
0 0

Balance 743,00
0

Accounts Receivable
Page No. 2

Particular 2021
2021 F Debit Particulars F Credit
s
GJ-1 March 2 GJ-1 45,000
March 4 80,000
1
Balance 35,000

Estimated Uncollectible Accounts

Page No. 3

2021 Particulars F Debit 2021 Particulars F Credit

12
 Laundry Supplies Inventory
Page No. 4

2021 Particulars F Debit 2021 Particulars F Credit

March 2 GJ-1 90,000

Laundry Equipment
Page No. 5

Particular 2021
2021 F Debit Particulars F Credit
s
GJ-1 150,00
March 3
0

Accumulated Depreciation-Laundry Equipment

Page No.
6

2021 Particulars F Debit 2021 Particulars F Credit

LIABILITIES

Notes Payable
Page No.
7
2021 Particulars F Debit 2021 Particulars F Credit
March 17 GJ-1 100,000

Accounts Payable
Page No. 8

2021 Particulars F Debit 2021 Particulars F Credit

2 GJ-1 March GJ- 90,000
March 60,000 2
5 1
Balance 30,000

Accrued Advertising
Page No. 9
2021 Particulars F Debit 2021 Particulars F Credit

OWNER’S EQUITY

13
 S. Santos, Capital
Page No. 10

2021 Particulars F Debit 2021 Particulars F Credit

March 1 GJ-1 850,000

S. Santos, Drawing
Page No. 11

2021 Particulars F Debit 2021 Particulars F Credit

1 GJ-1
March 10,000
2

Income and Expense Summary

Page No. 12

2021 Particulars F Debit 2021 Particulars F Credit

INCOME

Laundry Income
Page No. 13

2021 Particulars F Debit 2021 Particulars F Credit

March 4 GJ-1 80,000

EXPENSES

Uncollectible Accounts
Page No. 14

2021 Particulars F Debit 2021 Particulars F Credit

Depreciation Expense
Page No. 15

2021 Particulars F Debit 2021 Particulars F Credit

Salaries Expense
Page No. 16

2021 Particulars F Debit 2021 Particulars F Credit

March 3 GJ-1 10,000

14
 0

Rent Expense
Page No. 17

2021 Particulars F Debit 2021 Particulars F Credit

March 30 GJ-1 5,000

Utilities Expense
Page No. 18

2021 Particulars F Debit 2021 Particulars F Credit

3 GJ-1
March 12,000
0

Laundry Supplies Expense

Page No. 19

2021 Particulars F Debit 2021 Particulars F Credit

Taxes and Licenses

Page No. 20

2021 Particulars F Debit 2021 Particulars F Credit

1 GJ-1
March 4,000
0

Advertising Expense
Page No. 21

2021 Particulars F Debit 2021 Particulars F Credit

Interest Expense
Page No. 22

Particular 2021
2021 F Debit Particulars F Credit
s
1 GJ-1
March 1,000
7

THE T- ACCOUNT

15
 The effect of changes in Assets, Liabilities, and Owner’s Equity are being summarized
in an accounting device called “T- account”. This device will group these accounting values
with their amounts belonging to one item only. In the item “Cash” for example, all amounts
representing increases and decreases in cash are entered in the account Cash.
A T- account is divided into two sides. The left-hand side, which is called the debit
side, and the right-hand side, which is called the credit side. The left-hand side or debit
side shows the value received while the right-hand side or credit side shows the value
parted with of a transaction analysis. The device is commonly called T- Account because it
resembles a capital letter “T”. An account title is written above the T- Account.
Shown below is the formation of an Account.

ACCOUNT TITLE
Left-Hand Side Right-Hand Side
Or or
Debit Side Credit Side
is for is for
VALUE RECEIVED VALUE PARTED WITH

An amount entered on the left-hand side of the account is called a Debit Entry while
the amount entered on the right-hand side is called a Credit Entry.

Here is an illustration for the T-Account for the item “Cash”.

Illustrative transactions:
On January 8, received from sales cash of P25,000.
On January 10, paid in cash unpaid licenses in the amount of P10,000.

CASH
Dr. Cr.
1/8 P25,000 1/10 P10,000

Another example: The following are some journal entries of ABC Commercial for the
month of August 2021. Determine the balance of Cash and Notes Payable using the
T-Account:
August 1 – Dr. Cash - 50,000
Cr. Notes Payable - 50,000

3 - Dr. Equipment - 8,000

Cr. Cash - 8,000

4 - Dr. Cash - 12,000

Cr. Sales - 12,000

5 - Dr. Notes Payable - 5,000

Cr. Cash - 5,000

CASH NOTES PAYABLE

Dr. Cr. Dr. Cr.

8/1 50,000 8/3 8,000 8/5 5,000 8/1 50,000

8/4 12,000 8/5 5,000 5,000
16
 62,000 13,000 45,000
13,000
49,000

As seen in the illustration above of the T-Account of Cash, the amount of 13,000 in the
credit side is deducted from 62,000 on the debit side to arrive at the 49,000 balance of debit.
When “closing” an asset account, (closing of account being the term to describe totaling the
debits and credits of an account to arrive at its ending balance) we deduct the total credits to
arrive at the total debits because the normal account balance of an Asset is on the “debit
side”. We have learned earlier that the left side of the accounting equation is the Asset and
that is why we have Cash on the left side, the debit side. In the same manner, we deduct
the 5,000 amount of debit on Notes Payable from its total credits which is 50,000 to arrive
at its ending balance of 45,000, usually on right side, the credit side.

OPEN ACCOUNTS
After footing the accounts in the General Ledger, certain accounts result in having either
a “debit” or “credit” balances. These accounts are referred to as “Open Accounts” or
accounts with “Open Balances”.
Taken from the General Ledger of DAVAO LAUNDRY SERVICES, the following
accounts are with open balances:

Debit Credit
Balance Balance

Cash in Bank P 743,000

Accounts Receivable 35,000
Laundry Supplies Inventory 90,000
Laundry Equipment 150,000
Notes Payable P 100,000
Accounts Payable 30,000
S. Santos, Capital 850,000
S. Santos, Drawing 10,000
Laundry Income 80,000
Salaries Expense 10,000
Rent Expense 5,000
Utilities Expense 12,000
Taxes & Licenses 4,000
Interest Expense 1,000

These account balances will comprise the Trial Balance (Trial Balance of
Balances).

Lesson 3 – TRIAL BALANCE PREPARATION

The preparation of a trial balance is the 3 rd step in the accounting process. It is

merely copying carefully what has been footed in the ledger. Remember, a trial balance does
not prove that transactions have been correctly analyzed and recorded in the proper
accounts. This proves only one aspect of the ledger that is the equality of debits and

17
credits. This report summarizes the debit and credit entries of each account in the General
Ledger.

PROCEDURES IN PREPARING THE TRIAL BALANCE

Remember, all account titles that appeared in the Chart of Accounts are being provided
with one page of the ledger.

1st step
See to it that footing of each ledger account is properly done.

2nd step
List down all accounts in the General Ledger with “open balances”
following the sequence of filling the accounts in the ledger and
simultaneously write down the accounts’ amount balance in the debit or
credit column of the trial balance depending on what account balance
they may have. No indentions are made in listing the account titles.

3rd step
After listing the last account title, draw a single line across the two
amount columns and foot the debit and credit money columns. The
single line drawn is called “single rule”.

4th step
As the debit and credit totals are equal, draw a double line under the
totals of both columns. The double line drawn is called “Double Rule”
which signifies that the trial balance is already “in-balance”.

A trial balance is of two (2) forms. One is the trial balance of balances and the other
is the trial balance of totals. When you are required to prepare a trial balance and no
mention was made of its form, it is understood to be a trial balance of balances.
A trial balance has the following headings:
a. Name of the business or proprietorship
b. Title of the report
c. Period covered by the report
The period covered by a trial balance depends upon the need of the bookkeepers or
accountants in preparing this summary report. It can be on a monthly, quarterly, semi-
annually or annually basis. This report can be prepared in any given period regardless of
whether financial statements are prepared or not.
The purpose of preparing a trial balance is to check the arithmetical or mathematical
accuracy in postings and footing of the debit and credit entries of accounts in the General
Ledger.

1) Trial Balance of Balances – Under this form of trial balance, the accounts whose debit
or credit balances in the general ledger remain open after footing has been done are
included in the list. All debit accounts are grouped together, credit accounts are
also grouped together with their corresponding balances.

Shown below is the Trial Balance of the DAVAO LAUNDRY SERVICES for the month
ended 31 March 20A presented under trial balance of balances format.

18
 This becomes the
unadjusted trial
Davao Laundry Services balance in the
Trial Balance worksheet.
March 31, 20A

Account Titles F Debit Credit

Cash in Bank 1 P 743,000
Accounts Receivable 2 35,000
Laundry Supplies 4 90,000
Inventory
Laundry Equipment 5 150,000
Notes Payable 7 P 100,000
Accounts Payable 8 30,000
S. Santos, Capital 1 850,000
0
S. Santos, Drawing 1 10,000
1
Laundry Income 1 80,000
3
Salaries Expense 1 10,000
6
Rent Expense 1 5,000
7
Utilities Expense 1 12,000
8
Taxes & Licenses 2 4,000
0
Interest Expense 2 1,000
2
Total P 1,060,000 P 1,060,000

Single Double Rule/line

Rule/line It signifies that debit
and credit are equal.

The trial balance is said to be “in balance” if the total of debit is equal with
the total of credit. If not, the trial balance is said to be “out of balance”. Accuracy
wise, when the trial balance is “in balance” we take an assumption that no error has been
committed in the process of journalizing and posting.
2) Trial Balance of Totals – Under this form of a trial balance, both debit and credit
entries of a particular account in the general ledger will appear in the listings including the
closed account (debit is equal to credit).

For example, if the debit to Notes Receivable account is P5,000.00 and the credit
entry is also P5,000.00, under the trial balance of balances, the account will no
longer appear as the account is closed whereas under the trial balance of totals
both total debit and credit of P5,000.00 each will still be included . The formation of
trial balance of totals is hereunder presented:

Davao Laundry Services

Trial Balance of Totals
March 31, 20A 19
Debit Credit
Cash in Bank P 995,000 P 252,000
ERRORS IN TRIAL BALANCE
Errors and omissions are very common to occur because of the volume of works to be
done which may result to a trial balance that is still “in balance” or “out of balance.”
Some errors and omissions committed that will result a trial balance to be “in balance”
are as follows:
1. A transaction may not have been recorded in the journal; (omission)
2. A journal entry may not have been posted in the ledger in its entirety; (omission)
3. Posting a correct amount to a wrong account; (error)
Example: The correct amount of P250 which was debited to Accounts
Receivable was erroneously posted to Accounts Payable ledger.

4. Wrong charging of account title in the journal entry and was carried to posting in the
ledger; (error)
Example: When a typewriter was bought, it was erroneously debited to Office
Supplies Expense account instead of Office Equipment.

Some errors and omissions committed that will result a trial balance to be “ out of
balance” are as follows:
1. The footing of the debit and credit columns of the trial balance is wrong; (error)
2. An account with “open balance” in the General Ledger was not listed in the trial
balance; (omission)
3. The footing of the account balance in the General Ledger is wrong; (error)
4. Posting the amount of an item to the wrong side of the account or ledger; (error)

Example: An amount of P200 which was debited to account “Cash” was posted
to the credit side of the said account.
5. Omission in posting of either debit or credit entry in the journal; (omission)

Example: In a journal entry debiting Cash and crediting Accounts Receivable,

posting was made for Cash but no posting was made for the Accounts
Receivable account.

20
 6. The balance of an account is listed in the trial balance with a wrong amount, such as
transposition of the amount or sliding of the amount or listing a different amount
from the correct one.

Example of an error in the transposition is the figure 1,528 is incorrectly written

as 1,258. Sliding is an error in placing the decimal point of a figure. Like for
example, P10.00 is incorrectly written as P1.00, P235.00 as P2.35 and the like.

When a deliberate or an intentional act is done by letting it appear that the trial
balance is “in-balance” although actually “out of balance” by changing the amount or
charging an account with the amount of the unlocated difference, the trial balance is said to
be “forced balance” which is never permissible in the accounting practice. This deliberate
act, however, can be discovered during an “audit” or “examination of books of accounts.”

LOCATING ERRORS IN THE TRIAL BALANCE

The following procedure is suggested to locate the errors or omissions committed
that caused the trial balance to be “out of balance.”

2nd step
Go over with the
listed account
balances and
1st step check whether
they are all in its 3rd step
Add again the
normal balances. Get the amount of
debit and credit
A debit item might difference
columns of the
have been listed in between the debit
trial balance. If out
the cedit column and credit totals.
of balance, then,
and vise versa. If
found correct and
the trial balace is
still "out of
balance," then,

If the amount of difference is 1, 10, 100, or 1,000, it might be a)

an error in addition;

If the amount of difference is 9 or a multiple of 9, the orders b)

of figures written are reversed; for example, 25 was written
as 52 or 38 was written as 83. This is a transposition error;

If the amount of difference is divisible by 2 it might be an c)

error in listing the account balance. A debit amount was
listed in the credit column of the trial balance and vice versa;

If the amount of difference is divisible by 9 (can be divided

by 9) it indicates as slide or misplacement of decimal point.
For example, P50 is incorrectly written as P5 or P235 as
d)
P2.35. This is a sliding error.

If the trial balance is still out of balance, the only alternative is to go over with your
work starting from the Trial Balance, to the Ledger and finally to the Journal rather than
tracing the error from the Journal, to the Ledger and to the Trial Balance.

21
 Sub-step a to d of step 3 could not be applied if there are two or more errors being
committed simultaneously.
At present days, adding machine and calculators are already of casual use and even
computers are born. With these inventions, error in bookkeeping and accounting are no
longer in arithmetical or mathematical reasons but more of deficiencies in the background of
accounting and omissions that may have arisen from out of carelessness in the working
process.

REFERENCES:

Florendo, Joselito G. (First Edition). Fundamentals of Accountancy, Business, and

Management 1. Rex Bookstore, Manila, Philippines

Lopez, Rafael Jr. M. (2016 Edition). Fundamentals of Accounting (Simplified Procedural

Approach). Davao City, Philippines: MS LOPEZ Printing & Publishing

Lopez, Rafael Jr. M. (2018). Basic Accounting for Hotel & Restaurant Management, Hospitality
and Tourism (1st ed.). MS LOPEZ Printing & Publishing

22