Fundamentals of Accounting,

Business and Management 1

(Module)

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 Chapter 1 DEFINE ACCOUNTING

Content Standards
The learners demonstrate an understanding of the definition, nature, function, and history of
accounting.

Performance Standards
The learners shall be able to cite specific examples in which accounting is used in making business
decisions.

Learning Competencies
The learners shall be able to

 define accounting
 describe the nature of accounting
 narrate the history/origin of accounting

ACCOUNTING
Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an
organization to interested users. (Weygandt, J. et. al)

IDENTIFYING – this involves selecting economic events that are relevant to a particular business
transaction. The economic events of an organization are referred to as transactions.
Examples of economic events or transactions - In a bakery business:

 sales of bread and other bakery products

 purchases of flour that will be used for baking
 purchases of trucks needed to deliver the products

RECORDING – this involves keeping a chronological diary of events that are measured in pesos. The
diary referred to in the definition are the journals and ledgers which will be discussed in future
chapters.
COMMUNICATING – occurs through the preparation and distribution of financial and other accounting
reports.
Nature of Accounting
According to Accounting Theory: “Accounting is a systematic recording of financial transactions and
the presentation of the related information to appropriate persons.”
Based on this definition we can derive the following basic features of accounting:

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  Accounting is a service activity. Accounting provides assistance to decision makers by
providing them financial reports that will guide them in coming up with sound decisions.

 Accounting is a process. A process refers to the method of performing any specific job step-by-
step according to the objectives or targets. Accounting is identified as a process, as it performs
the specific task of collecting, processing and communicating financial information.

 Accounting is both an art and a discipline. Accounting is the art of recording, classifying,
summarizing and finalizing financial data. The word ‘art’ refers to the way something is
performed. It is behavioral knowledge involving a certain creativity and skill to help us attain
some specific objectives. Accounting is a systematic method consisting of definite techniques
and its proper application requires skill and expertise. So by nature, accounting is an art. And
because it follows certain standards and professional ethics, it is also a discipline.

 Accounting deals with financial information and transactions. Accounting records financial
transactions and data, classifies these and finalizes their results given for a specified period of
time, as needed by their users.

 Accounting is an information system. Accounting is recognized and characterized as a

storehouse of information. As a service function, it collects processes and communicates
financial information of any entity. This discipline of knowledge has evolved to meet the need
for financial information as required by various interested groups.

History of Accounting
Accounting is as old as civilization itself. It has evolved in response to various social and economic
needs of men.

 The Cradle of Civilization. Around 3600 B.C., record-keeping was already common from
Mesopotamia, China and India to Central and South America. The oldest evidence of this
practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the
time such as listing of accounts receivable and accounts payable.

 14th Century - Double-Entry Bookkeeping. The most important event in accounting history is
generally considered to be the dissemination of double-entry bookkeeping by Luca Pacioli (‘The
Father of Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a
friend and contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are
widely acknowledged as the fathers of modern accounting and were the first to commonly use
Arabic numerals, rather than Roman, for tracking business accounts. Luca Pacioli wrote
Summa de Arithmetica, the first book published that contained a detailed chapter on double-
entry bookkeeping.

 French Revolution (1700s). The thorough study of accounting and development of accounting
theory began during this period. Social upheavals affecting government, finances, laws,
customs and business had greatly influenced the development of accounting.

 The Industrial Revolution (1760-1830). Mass production and the great importance of fixed
assets were given attention during this period.

 19th Century – The Beginnings of Modern Accounting in Europe and America. The modern,
formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a

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 Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the
Chartered Accountant (CA). In the late 1800s, chartered accountants from Scotland and Britain
came to the U.S. to audit British investments. Some of these accountants stayed in the U.S.,
setting up accounting practices and becoming the origins of several U.S. accounting firms. The
first national U.S. accounting society was set up in 1887. The American Association of Public
Accountants was the forerunner to the current American Institute of Certified Public
Accountants (AICPA). In this period rapid changes in accounting practice and reports were
made. Accounting standards to be observed by accounting professionals were promulgated.
Notable practices such as mergers, acquisitions and growth of multinational corporations were
developed. A merger is when one company takes over all the operations of another business
entity resulting in the dissolution of another business. Businesses expanded by acquiring other
companies. These types of transactions have challenged accounting professionals to develop
new standards that will address accounting issues related to these business combinations.

 The Present - The Development of Modern Accounting Standards and Commerce. The
accounting profession in the 20th century developed around state requirements for financial
statement audits. Beyond the industry's self-regulation, the government also sets accounting
standards, through laws and agencies such as the Securities and Exchange Commission (SEC).
As economies worldwide continued to globalize, accounting regulatory bodies required
accounting practitioners to observe International Accounting Standards. This is to assure
transparency and reliability, and to obtain greater confidence on accounting information used
by global investors. Nowadays, investors seek investment opportunities all over the world. To
remain competitive, businesses everywhere feel the need to operate globally. The trend now
for accounting professionals is to observe one single set of global accounting standards in order
to have greater transparency and comparability of financial data across borders.

Activity 1.1. Explain the following.

1. Three meanings of accounting.
2. Reasons why double-entry in accounting is being used for a long time.
3. Development of accounting in the Philippines.

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 Chapter 2 USERS OF ACCOUNTING INFORMATION

Content Standards
The learners demonstrate an understanding of the external and internal users of financial information.

Performance Standards
The learners shall be able to cite users of financial information and identify whether they are external
or internal users.

Learning Competencies
The learners shall be able to

 define external users and gives examples

 define internal users and give examples

Users of Accounting Information

1. Internal Users
Internal users of accounting information are those individuals inside a company who plan, organize,
and run the business. These users are directly involved in managing and operating the business.
These include:

 marketing managers
 production supervisors
 finance directors
 company officers
 owners
2. External Users
External users are individuals and organizations outside a company who want financial information
about the company. These users are not directly involved in managing and operating the business.

Two Most Common Types of External Users

1. Potential Investors
Potential Investors use accounting information to make decisions to buy shares of a company.

2. Creditors

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 Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of
granting credit or lending money.
Also included as external users are:

 government regulatory agencies such as Securities and Exchange Commission (SEC), Bureau of
Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social Security System
(SSS), and Local Government Units (LGUs).

External users (Secondary Users) of accounting information include the following:

Creditors: for determining the credit worthiness of an organization. Terms of credit are set by creditors
according to the assessment of their customers' financial health. Creditors include suppliers as well as
lenders of finance such as banks.
Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.
Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can
earn a reasonable return on their investment before they commit any financial resources to a
company.
Customers: for assessing the financial position of its suppliers which is necessary for them to maintain
a stable source of supply in the long term.
Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting
information is in accordance with the rules and regulations set in order to protect the interests of the
stakeholders who rely on such information in forming their decisions.

SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL USERS

Internal users of accounting information are those who are involved in planning, organizing and
running the business. They need more detailed information on a timely basis in order to support their
decisions. Examples of these internal users are managers, employees and owners.
The external users of accounting information are those individuals or organizations outside a company
who are interested in its financial information. Examples of these external users are potential
investors, suppliers and government agencies.

Activity 2.1. Give answer to the following.

1. Is the Local Government Unit (LGU) interested in your accounting reports? Why?
2. Are the officers of the Local Government Unit internal or external users? Why?
3. Differentiate internal users from external users of accounting information.

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 Chapter 3 ACCOUNTING CONCEPTS AND PRICIPLES

Content Standards
The learners demonstrate an understanding of accounting Concepts and Principles

Performance Standards
The learners shall be able to identify generally accepted accounting principles.

Learning Competencies
The learners shall be able to explain the varied accounting concepts and principles; solve exercises on
accounting principles as applied in various cases.

Accounting Principles

 Business Entity Principle – a business enterprise is separate and distinct from its owner or
investor.
Examples: If the owner has a barber shop, the cash of the barber shop should be reported
separately from personal cash. The owner had a business meeting with a prospective client.
The expenses that come with that meeting should be part of the company’s expenses. If the
owner paid for gas for his personal use, it should not be included as part of the company’s
expenses.

 Going Concern Principle – business is expected to continue indefinitely.

Example: When preparing financial statements, you should assume that the entity will continue
indefinitely.

 Time Period Principle – financial statements are to be divided into specific time intervals.
Example: Philippine companies are required to report financial statements annually.

 Monetary Unit Principle – amounts are stated into a single monetary unit.
Example: Jollibee should report financial statements in pesos even if they have a store in the
United States. IHOP should report financial statements in dollars even if they have a branch
here in the Philippines.
 Objectivity Principle – financial statements must be presented with supporting evidence.
Example: When the customer paid Jollibee for their order, Jollibee should have a copy of the
receipt to represent as evidence.

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  Cost Principle – accounts should be recorded initially at cost.
Example: When Jollibee buys a cash register, it should record the cash register at its price
when they bought it. When a company purchases a laptop, it should be recorded at the price it
was purchased.

 Accrual Accounting Principle – revenue should be recognized when earned regardless of

collection and expenses should be recognized when incurred regardless of payment. On the
other hand, the Cash Basis Principle in which revenue is recorded when collected and expenses
should be recorded when paid. Cash basis is not the generally accepted principle today.
Example: When a barber finishes performing his services he should record it as revenue. When
the barber shop receives an electricity bill, it should record it as an expense even if it is unpaid.

 Matching Principle – cost should be matched with the revenue generated.

Example: When you provide tutorial services to a customer and there is a transportation cost
incurred related to the tutorial services, it should be recorded as an expense for that period.

 Disclosure Principle – all relevant and material information should be reported.

Example: The company should report all relevant information.

 Conservatism Principle – also known as prudence. In case of doubt, assets and income should
not be overstated while liabilities and expenses should not be understated. Example: In case of
doubt, expenses should be recorded at a higher amount. Revenue should be recorded at a
lower amount.

 Materiality Principle – in case of assets that are immaterial to make a difference in the financial
statements, the company should instead record it as an expense. Example: A
school purchased an eraser with an estimated useful life of three years. Since an eraser is
immaterial relative to assets, it should be recorded as an expense.

Activity 3.1. Multiple Choice. Choose the letter of the correct answer.
1. The accounting guideline that requires financial statement information to be supported by
independent, unbiased evidence other than someone's belief or opinion is the:
a. Business entity principle
b. Monetary unit principle
c. Going-concern principle
d. Cost principle
e. Objectivity principle

2. The principle that requires every business to be accounted for separately and distinctly from its
owner or owners is known as the:
a. Objectivity principle
b. Business entity principle
c. Going-concern principle

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 d. Revenue recognition principle
e. Cost principle

3. The rule that requires financial statements to reflect the assumption that the business will continue
operating instead of being closed or sold, unless evidence shows that it will not continue, is the:
a. Going-concern principle
b. Business entity principle
c. Objectivity principle
d. Cost Principle
e. Monetary unit principle

4. To include the personal assets and transactions of a business's owner in the records and reports of
the business would be in conflict with the:
a. Objectivity principle
b. Realization principle
c. Business entity principle
d. Going-concern principle
e. Revenue recognition principle

5. The objectivity principle:

a. means that information is supported by independent, unbiased evidence.
b. means that information can be based on what the preparer thinks is true.
c. means that financial statements should contain information that is optimistic.
d. means that a business may not re-organize revenue until cash is received.
6. Marian Mosely is the owner of Mosely Accounting Services. Which accounting principle requires
Marian to keep her personal financial information separate from the financial information of Mosely
Accounting Services?
a. Monetary unit principle
b. Going-concern principle
c. Cost principle
d. Business entity principle

7. Which of the following accounting principles would require that all goods and services purchased be
recorded at cost?
a. Going-concern principle
b. Continuing-concern principle
c. Cost principle
d. Business entity principle

Activity 3.2. Matching type. Match the following words with their definition:
a. Going concern principle e. Time period principle h. Monetary unit principle
b. Objectivity principle f. Cost principle i. Accrual accounting principle
c. Matching principle g. Disclosure principle j. Conservatism principle

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d. Materiality principle

___________________ 1. All relevant information should be included in the financial reports.

___________________ 2. In case of doubt, assets and income should not be overstated.
___________________ 3. Assume that the company will continue indefinitely.
___________________4. All transactions should be supported by unbiased evidence.
___________________ 5. Expenses should be recorded in the period when the revenue is
generated.
___________________ 6. Minimal costs incurred should be recorded as an expense.
___________________ 7. A Philippine company should report financial statements in pesos.
___________________ 8. A barber who performs services for a client should record revenue.
___________________ 9. Statement of Financial position should be recorded as of
December 31, 2015.
___________________ 10. A company that purchases furniture should record it at its acquisition
price.

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 Chapter 4 TYPES OF MAJOR ACCOUNTS

Content Standards
The learners demonstrate an understanding of the five major accounts, namely: assets, liabilities,
capital, income and expenses.

Performance Standards
The learners shall be able to define, identify, and classify accounts according to the five major types.

Learning Competencies
The learners shall be able to

 discuss the five major accounts

 prepare a chart of accounts

Types of Major Accounts

1. Assets are the resources owned and controlled by the firm.
2. Liabilities are obligations of the firm arising from past events which are to be settled in the
future.
3. Equity or Owner’s Equity are the owner’s claims in the business. It is the residual interest in the
assets of the enterprise after deducting all its liabilities.
4. Income is the increase in economic benefits during the accounting period in the form of inflows
of cash or other assets or decreases of liabilities that result in increase in equity. Income
includes revenue and gains.
5. Expenses are decreases in economic benefits during the accounting period in the form of
outflows of assets or incidences of liabilities that result in decreases in equity.

1. Assets
Difference between Current vs. Non-Current Assets, and Tangible vs. Intangible Assets.

 Current Assets are assets that can be realized (collected, sold, used up) one year after year-
end date.
 Non-current Assets are assets that cannot be realized (collected, sold, used up) one year after
year-end date.
 Tangible Assets are physical assets such as cash, supplies, and furniture and fixtures.

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  Intangible Assets are non-physical assets such as patents and trademarks
Account titles used for Asset Accounts
Current Assets
1. Cash is money on hand, or in banks, and other items considered as medium of exchange in
business transactions.
2. Cash Equivalents are short term, highly liquid investments that are readily convertible to
known amounts of cash which are subject to an insignificant risk of changes in value.
3. Accounts Receivable are amounts due from customers arising from credit sales or credit
services.
4. Notes Receivable are amounts due from clients supported by promissory notes.
5. Inventories are assets held for resale
6. Supplies are items purchased by an enterprise which are unused as of the reporting date.
7. Prepaid Expenses are expenses paid in advance. They are assets at the time of payment and
become expenses through the passage of time.

Non-Current Assets
1. Property, Plant and Equipment are long-lived assets which have been acquired for use in
operations.
2. Long term Investments are the investments made by the company for long-term purposes
3. Intangible Assets are assets without a physical substance. Examples include franchise and
copyright.

2. Liabilities
Liabilities are the debts and obligations of the company to another entity.

Difference Between Current vs. Non-Current Liabilities

 Current Liabilities. Liabilities that fall due (paid, recognized as revenue) within one year after
year-end date.
 Non-current Assets are liabilities that do not fall due (paid, recognized as revenue) within one
year after year-end date.

Account Titles Used for Liability Accounts

Current Liabilities
1. Accounts Payable are amounts due, or payable to, suppliers for goods purchased on account
or for services received on account.
2. Notes Payable are amounts due to third parties supported by promissory notes.
3. Accrued Expenses are expenses that are incurred but not yet paid (examples: salaries payable,
taxes payable)
4. Unearned Income is cash collected in advance; the liability is the services to be performed or
goods to be delivered in the future.

Non-Current Liabilities

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 1. Mortgage Payable are long-term debt of the business entity for which the business entity has
pledge certain assets as security to the creditor

3. Owner’s Equity
Owner’s Equity is the residual interest of the owner from the business. It can be derived by deducting
liabilities from assets.
1. Capital is the value of cash and other assets invested in the business by the owner of the
business.
2. Drawing is an account debited for assets withdrawn by the owner for personal use from the
business.

4. Income
Income is the Increase in resources resulting from performance of service or selling of goods.

 Service revenue for service entities

 Sales for merchandising and manufacturing companies

5. Expense
Expense is the decrease in resources resulting from the operations of business. Expenses decreases
Equity in the accounting equation
Examples of Expense: Salaries Expense, Interest Expense, Utilities Expense
Chart of Accounts

 A chart of accounts is a listing of the accounts used by companies in their financial records.
 The chart of accounts helps to identify where the money is coming from and where it is going.
 The chart of accounts is the foundation of the financial statements.

Steps in the Preparing of a Chart of Accounts

1. Create two columns.
2. Prepare the assets first, then liabilities, then equity, then revenue and expenses.
3. List all assets, liabilities, equity, revenue and expenses account in the first column.
4. On the second column, choose an account code (discretion of the company).
5. On the third column, write the description for each account on when to use it.

An example of a chart of accounts is given below:

Accounts Account Code Description

*may vary
Assets
Cash 100 Use for actual cash transaction
Accounts Receivable 120 Use for customers who will pay in the future
Inventory 130 Use for items held for sale
Prepaid Expense 140 Use for expenses paid in advance
Supplies 150 Use on items to be use d in the future
Office Equipment 160 Use for equipment that are used in the office

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 Store Equipment 170 Use for equipment that are used in the store
Land 180 Use for land used in operation
Liabilities
Accounts Payable 200 Use for debts of the company
Notes Payable 210 Use for promissory notes issued by the company
Salaries Payable 220 Use for salaries to be paid in the future
Capital
Owner’s, Capital 300 Use for investment of owner/s
Owner’s, Withdrawal 400 Use for drawings of owners from the company
Service Revenue 500 Use for earnings
Salaries Expense 600 Use for salaries incurred, regardless of payment
Utilities Expense 610 Use for electricity and water expenses incurred

Activity 4.1. Identify if the account is an asset, liability, equity, income or expense.

Account Asset Liabilities Owner's Income Expense

Equity
1 Accounts Receivable
2 Advertising Expense
3 Bonds Payable
4 Building
5 Cash
6 Cruz, Capital
7 Cruz, Drawing
8 Delivery Truck
9 Interest Payable
10 Inventories
11 Land
12 Mortgage Loan
13 Notes Payable
14 Notes Receivable
15 Office Supplies
16 Prepaid Expense
17 Salaries Expense
18 Salaries Payable
19 Supplies Expense
20 Unearned Income

Activity 4.2. Matching Type.

Assets Accounts Receivable Intangible Assets

Liabilities Notes Receivable Property, Plant and Equipment
Owner’s Equity Rent Expense Cash Prepaid Expense

____________ 1. It is the obligations of the company payable in money, goods or services.

____________ 2. These are non-current tangible assets.

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____________ 3. These assets are identifiable, non-monetary assets without physical substance.
____________ 4. It is the claim of the owner also known as the capital.
____________ 5. It is the most liquid asset and is the medium of exchange for business transactions.
____________ 6. It is an expense for leased office space, equipment or assets rented from others.
____________ 7. Examples of this are cash, account receivable and prepaid expenses. ____________
8. It is a written promise from the customer to pay his receivables on a certain future date.

Activity 4.3. Arrange the accounts in the order in which they would appear in the ledger. Assign each
account a number, using four digit numbering scheme: 1000 series for assets, 2000 series for
liabilities , etc. Use the second digit to indicate specific accounts within a major category.

Consulting Revenues Gonzales, Withdrawals Accounts Receivable

Building Office Supplies Cash
Gonzales, Capital Rent Expense Notes Payable
Furniture and Fixtures Prepaid Rent Land
Interest Expense Miscellaneous Expense Salaries Expense
Referral Revenues Unearned Consulting Revenues Office Supplies
Interest Payable Insurance Expense Accounts Payable

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 Chapter 5 THE ACCOUNTING EQUATION

Content Standards
The learners demonstrate an understanding of the accounting equation.

Performance Standards
The learners shall be able to solve problems by applying the accounting equation.

Learning Competencies
The learners shall be able to illustrate the accounting equation; perform operations involving simple
cases with the use of the accounting equation.

Accounting Equation

Assets = Liabilities + Owner’s Equity

Assets invested by the owner

July 1 - Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred
during the month of July. He invested PHP800,000 cash and Cars amounting to PHP200,000

Assets = Liabilities Owner’s Equity

+
Cash P800,000 Reyes, Capital P1,000,000
Service Vehicle 200,000

Borrowings from the bank

July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.

Assets = Liabilities Owner’s Equity

+
Cash P900,000 Notes Payable P100,000 Reyes, Capital P1,000,000
Service Vehicle P200,000

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Asset purchased for cash
July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash.

Assets = Liabilities Owner’s Equity

+
Cash P855,000 Notes Payable P100,000 Reyes, Capital P1,000,000
Service Vehicle P200,000
Furnitures P 45,000

Assets purchased on account

July 15 – Various equipment were purchased on account from Fortune Company for PHP55,000

Assets = Liabilities Owner’s Equity

+
Cash P855,000 Notes Payable P100,000 Reyes, Capital P1,000,000
Service Vehicle P200,000 Accounts Payable P 55,000
Furnitures P 45,000
Equipment P 55,000

Cash withdrawal by the owner

July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use

Assets = Liabilities Owner’s Equity

+
Cash P850,000 Notes Payable P100,000 Reyes, Capital P1,000,000
Service Vehicle P 200,000 Accounts Payable P 55,000 Reyes, Drawings (P 5,000)
Furnitures 45,000
Equipment 55,000

Payment of liability
July 20 – The account due to Fortune Company was paid in cash.

Assets = Liabilities Owner’s Equity

+
Cash P795,000 Notes Payable P100,000 Reyes, Capital P1,000,000
Service Vehicle P 200,000 Reyes, Drawings (P 5,000)
Furnitures 45,000
Equipment 55,000

The following table summarizes the effects of these transactions on the accounting equation
Date ASSETS Liabilities Owner’s Equity
Date Cash Service Furnitures Equipment Loans Accounts Reyes, Reyes,
Vehicle Payable Payable Drawings Capital
1 800,000 200,000 1,000,000
2 100,000 100,00
Balances 900,000 200,000 100,000 1,000,000
7 (45,000) 45,000
Balances 855,000 200,000 45,000 100,000 1,000,000
15 55,000 55,000
Balances 855,000 200,000 45,000 55,000 100,000 55,000 1,000,000

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 18 (5,000) (5,000)
Balances 850,000 200,000 45,000 55,000 100,000 55,000 1,000,000
20 (55,000) (55,000) (5,000)
Balances 795,000 200,000 45,000 55,000 100,000 0 (5,000) 1,000,000
1,095,000 1,095,000

Activity 5.1. Indicate whether it is an increase (+), decrease (-), or no effect on the asset, liabilities and
equity accounts.
Assets Liabilities Equity
_______ _______ _______ 1. Investment of cash in the business
_______ _______ _______ 2. Purchase of computer equipment for cash
_______ _______ _______ 3. Billed a customer for services rendered
_______ _______ _______ 4. Paid salaries
_______ _______ _______ 5. Purchased office supplies on credit
_______ _______ _______ 6. Paid advertising expense
_______ _______ _______ 7. Paid rent in advance for 3 months
_______ _______ _______ 8. Received cash from customers on account
_______ _______ _______ 9. Withdrew cash for personal use
_______ _______ _______ 10. Invested land into the company

Activity 5.2. Arrange the following asset, liability, and equity titles in a table: Cash; Accounts
Receivable; Office Supplies; Office Equipment; Exploration Equipment; Accounts Payable; Jerome
Garcia, Capital; Jerome Garcia, Withdrawals; Revenues; and Expenses. Use additions and subtractions
to show the effects of each transaction on the accounts in the accounting equation. Show new
balances after each transaction.
Jerome Garcia started a new business and completed these transactions during August:
August 1 Garcia invested PHP48,000 cash in the business.
1 Rented office space and paid PHP800 cash for the August rent.
3 Purchased exploration equipment for PHP22,000 by paying PHP12,000 cash and
agreeing to pay the balance in 3 months.
5 Purchased office supplies by paying PHP1,500 cash.
6 Completed exploration work and immediately collected PHP420 cash for the work.
8 Purchased PHP1,350 of office equipment on credit.
15 Completed exploration work on credit in the amount of PHP8,000.
18 Purchased PHP700 of office supplies on credit. 20 Paid cash for the office
equipment purchased on August 8.
24 Billed a client PHP2,400 for work completed; the balance is due in 30 days.

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 28 Received PHP5,000 cash for the work completed on August 15.
30 Paid the assistant’s salary of PHP1,100 cash for this month.
30 Paid PHP340 cash for this month’s utility bill.
30 Garcia withdrew PHP1,050 cash from the business for personal use.

Chapter 6 BOOK OF ACCOUNTS

Content Standards
The learners demonstrate an understanding of the two major types of accounts, namely, journal and
ledger.

Performance Standards
The learners demonstrate an understanding of the two major types of accounts, namely, journal and
ledger.

Learning Competencies
The learners shall be able to identify the uses of the two books of accounts; illustrate the format of a
general and special journals; and, illustrate the format of a general and subsidiary ledger.

Two major types of books of accounts

1. Journal
2. Ledger

1. Journal
Companies initially record transactions and events in chronological order (the order in which they
occur). Thus, 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.
The general journal is the most basic journal. Typically, a general journal has spaces for dates, account
titles and explanations, references, and two amount columns.

The journal makes several significant contributions to the recording process:

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  It discloses in one place the complete effects of a transaction.
 It provides a chronological record of transactions.
 It helps to prevent or locate errors because the debit and credit amounts for each entry can be
easily compared.

Journalizing process
Entering transaction data in the journal is known as journalizing. Companies make separate journal
entries for each transaction. A complete entry consists of:

 The date of the transaction which is entered in the Date column.

 The debit account title (that is, the account to be debited) which is entered first at the extreme
left margin of the column headed “Account Titles and Explanation,” and the amount of the
debit is recorded in the Debit column.
 The credit account title (that is, the account to be credited) which is indented and entered on
the next line in the column headed “Account Titles and Explanation,” and the amount of the
credit is recorded in the Credit column.
 A brief explanation of the transaction which appears on the line below the credit account title.
A space is left between journal entries. The blank space separates individual journal entries and
makes the entire journal easier to read.
 The column titled Ref. (which stands for Reference) which is left blank when the journal entry is
made. This column is used later when the journal entries are transferred to the ledger
accounts.

To illustrate the recording of transactions in the general journal, let us use the following transactions
as an example:

 On September 1, 2015, Mr. Ben Mabait invested PHP500,000 in a restaurant business by

opening an account with SuperBank.
 On September 5, 2015, purchased kitchen appliances for his business amounting to
PHP100,000 by issuing a check.
 On September 6, 2015, started his operations a made a sales for that day amounting to
PHP20,000.
 On September 7, 2015, Mr. Mabait purchased a motorcycle costing PHP80,000. He pays
PHP30,000 cash and agrees to pay the remaining PHP50,000 on account (to be paid later).

General Journal
Date Account Title and Explanation Ref Debit Credit
09/01/201 Cash P500,000
5 Mabait, Capital P500,000
To record investment of Mr. Ben
Mabait
09/05/201 Kitchen Appliances 100,00
5 Cash 100,000
To record purchase of kitchen
appliances
09/06/201 Cash 20,000
5 Sales 20,000
To record sales for the day.
09/07/201 Service Vehicle 80,000

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 9 Cash 30,000
Accounts Payable 50,000

2. Ledger
The ledger refers to the accounting book in which the accounts and their related amounts as recorded
in the journal are posted periodically. The ledger is also called the ‘book of final entry’ because all the
balances in the ledger are used in the preparation of financial statements. This is also referred to as
the T-Account because the basic form of a ledger is like the letter ‘T’.
The general ledger (commonly referred by accounting professionals as GL) is a grouping of all
accounts used in the preparation of financial statements. The GL is a controlling account because it
summarizes all the activities that have taken place as recorded in its subsidiary ledger.

The format of a general ledger is shown below:

General Ledger
Account: Cash Account No.: 1000
Date Item Ref Debit Credit Balance

 The account portion refers to the account title for example: cash, accounts receivable.
 The account number is an assigned number for each account title to facilitate ease in recording
and cross-referencing.
 The Date column identifies when the transaction happened.
 The item represents the source journal and the nature of the transactions
 The Reference identifies the page number of the general our special journal from which the
information was taken.
 The Debit and Credit columns are used in recording the amount of transactions from the
general journal or special journal.
 The Balance Column represents the running balance of the Account after considering the debit
and credit amounts. If the running balance amount is positive, the account has a debit balance
whereas if it has a negative running balance, the accounts has a credit balance.

Activity 6.1. Debits and Credits. Innovative designs, owned by Felipe Cruz, has been operating for two
years. Below is a series of transaction, indicate the account that should be debited and credited. If no
journal entry id required, write n/a in the columns. Use the following account titles: Cash; Accounts
Receivable; Supplies; Prepaid Expense; Cruz, Capital; Cruz; Withdrawals, Service Revenues; and
Operating Expenses.

Transactions Debit Credit

a. Purchased equipment for the use of the business;
paid one-third cash and gave a note payable for
the balance.
b. Paid cash for salaries.
c. Collected cash for services performed last period.

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d. Collected cash for service performed this period.
e. Performed service this period on credit.
f. Paid operating expenses incurred this period.
g. Incurred operating expenses this period to be paid
next period.
h. Purchased supplies; paid cash.
i. Paid cash for operating expenses incurred last
period.
j. Used some of the supplies form the inventory for
operations.
k. Made payment on equipment purchased last
period under notes payable.
l. Collected cash on accounts receivable for services
previously performed.
m. Paid cash on accounts payable for expenses
previously incurred.

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