Chapter 5

Double Entry Bookkeeping for a Service Provider

 The accounting cycle, also commonly referred to as accounting process, is a

series of activities that begins with a transaction and ends with the closing of the
books.

 Economic activities of an enterprise are referred to as transactions or events.

Business transaction is an economic activity that can be measured in terms of
money and which affects the assets, liabilities and owner’s equity.

 Classes of Transactions
o External Transactions– Economic activities between a business and an
external entity. Examples are selling services or merchandise to customers,
collecting claims from customers and payment to suppliers.
o Internal Transactions– Economic activities that take place within the
company. Examples are casualty losses, conversion of raw materials into
finished products and supplies used in the business.

 A transaction involves an exchange of monetary values – wherein one value is

received in exchange for another value given up. Every transaction should be
authenticated by a genuine business document. Business document (business
papers) also known as source document is an original source material evidencing
transactions.

 Common Source Documents

o Official Receipt– Document issued when cash is received from customers.
o Invoice – Document issued when services or goods were given to
customer. This is usually evidences the sale of services or goods sold on
account.
o Cash Voucher – Document used to support payments made by the
business. This is usually prepared to support cash payments and payments
made by checks.
o Cheque (Check) – Document drawn on a bank by the holder of a current
account.

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o Deposit Slip –Document serving as proof that cash and/or cheque has
been deposited in a bank account.
o Bank Statement – Document showing the activity in a company's bank
account. It contains information related with deposits, withdrawals,
interest earned, etc.
o Cash Register Tapes - Document automatically generated by the cash
register and provides an unbroken sequence of cash transactions and
events.
o Statement of Account–Document issued by a supplier to its customer in
regard to invoices unpaid at a particular date.
o Payroll Records– Document listing the salaries, wages, bonuses, net pay,
and deductions of a company’s employees.
o Payment Confirmation–Document serving as proof that payment has
been made, often used as proof of electronic transfers.

 Each transaction will have at least two effects on the accounting equation. There
are two values involved in a transaction, i.e. value received and value given up;
there should also be two parts for the recording of a transaction – a left-side and a
right-side.
An account may be expressed in a “T” device form where the debits are
recorded on the left-hand side and the credits are recorded on the right-hand side
of the letter “T”. As implied in its form, this device is called as a “T–account”.
Basically, a T-account has three parts namely: the account title, the debit side and
the credit side.
o Debit is an entry on the left side of an account
o Credit is an entry on the right side of an account

o The term debit comes from Latin debitum "that which is owed" from the past
participle of debere "to owe". Debit is abbreviated to Dr (for debtor). The
term credit comes from the Latin creditum meaning "that which is entrusted
or loaned" from the past participle of credere "to trust or entrust". Credit is
abbreviated to Cr (for creditor).

 The rules of the debit and credit are based on the normal balances of the
accounting element or account. The normal balance of asset, drawing and
expense accounts are on the debit side while liability, capital and revenue accounts
are on the credit side. The normal balance of the account provides the basis when
to debit or credit the account.
Normal
Accounts To Increase To Decrease
Balance
Rule 1 Assets Debit Debit Credit
Rule 2 Liabilities Credit Credit Debit
Rule 3 Owner’s Capital Credit Credit Debit
Rule 4 Owner’s Drawing Debit Debit Credit
Rule 5 Revenues Credit Credit Debit
Rule 6 Expenses Debit Debit Credit

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 Journal is the accounting book wherein business transactions are chronologically

recorded for the first time. It is called the book of original entry. The initial record
of each transaction is evidenced by a business document such as official receipt,
invoice, cash voucher, etc.
There are two major types of journal, the general journal and the special
journal. The general journal is the most basic of journals. The four special journals
are the sales journal, purchases journal, cash receipts journal and the cash
payments journal.

Date Account Titles and Explanation Ref. Debit Credit

Year
1. May 4
2. Cash 50,000
3. Des Marquez, Capital 50,000
4. (To record cash investment)
5.

Key: 1. Enter date in Date Column.

2. Enter debit account title(s) at left margin of Account titles and explanation
Column and amounts in Debit Column.
3. Enter credit account title(s) [INDENT CREDIT ACCOUNT TITLE(S)] and
amounts in Credit Column.
4. Enter explanation under account titles.
5. Ref. Column is left blank until posting.

The process of recording the business transaction or event in the journal is

called journalizing. The record of the transaction or event is called the journal entry.
The two types of journal entries are the (1) simple journal entry and the (2)
compound journal entry. A simple journal entry contains one debit and credit while
a compound journal entry contains one debit and two or more credits; two or more
debits and one credit; two or more debits and two or more credits.

 Since transactions are recorded in the journal according to their dates of

occurrence, items of similar nature are not grouped together. Ledger is a record
used for summarizing the effects of transactions upon individual accounts. It is
called the book of final entry.
The process of transferring to the ledger the same information recorded in
the journal is called posting.
General Journal Page No. 1

Date Account Titles and Explanation Ref. Debit Credit

Year
May 4
Cash 50,000
Des Marquez, Capital 310 50,000
(To record cash investment)

Ledger
Des Marquez, Capital Account No. 310

Date Ref. Debit Credit Credit Balance

Year
May 4 GJ1 50,000 50,000

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 Illustrative Problem: Journalizing and Posting Procedures

The chart of accounts of the B.A. Laundry Shop follows:
Statement of Financial Position Income Statement Accounts
Assets Revenue
110 Cash 410 Laundry Income
120 Accounts Receivable
130 Laundry Supplies Expenses
140 Laundry Equipment 510 Rent Expense
150 Delivery Vehicle 520 Taxes and Licenses
530 Salaries and Wages
Liability 540 Electricity and Water
210 Accounts Payable 550 Repairs and Maintenance
Owner’s Equity
310 Brian Aguila, Capital
320 Brian Aguila, Drawing

Transactions
March
1 – Brian Aguila opened a laundry business called the “B.A. Laundry Shop” with
capital composed of:
Cash ₱30,000
Laundry supplies 5,000
Laundry equipment 82,000

2 – Paid business license to the City Treasurer, ₱1,600.

Purchased a delivery vehicle from the Toyota Motors for ₱240,000, on account.
Paid rent of the building for the month, ₱6,000.

5 – Received ₱8,000 cash for laundry delivered to various customers.

Sent charge bill, ₱9,000, for laundry delivered on account to Crystal Hotel.

10 – Bought laundry supplies on account from Robinsons Superstore ₱3,000.

15 – Sent charge bill for laundry delivered on account to D&G Coffee Shop ₱11,000.
Paid the salaries of the truck driver ₱4,000 and laundry employee ₱4,400.

20 – Received cash as collections on account from:

Crystal Hotel ₱4,500
D&G Coffee Shop 5,400

25 – Received ₱4,400 cash for laundry delivered to various customers.

Paid ₱1,800 to Robinsons Superstore in partial payment of debt owing to it.
Brian Aguila withdrew ₱2,000 cash for his personal use.

27 – Paid ₱1,700 to repairman for repair service on the laundry equipment.

31 – Paid in cash the following:

Truck driver’s salary ₱4,000
Laundry employee’s salary 4,400
Electricity and water bill 3,700

Delivered laundry to the following:

Cash customers ₱5,200
Crystal Hotel (on account) 7,600

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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
March 1 Cash 30,000
Laundry Supplies 5,000
Laundry Equipment 82,000
Brian Aguila, Capital 117,000
~ Invested cash, supplies, & equipment in the business ~

2 Taxes and Licenses 1,600

Cash 1,600
~ Paid business tax ~

Delivery Vehicle 240,000

Accounts Payable – Toyota Motors 240,000
~ Bought delivery vehicle on account ~

Rent Expense 6,000

Cash 6,000
~ Paid rent for March ~

5 Cash 8,000
Laundry Income 8,000
~ Service performed for cash ~

Accounts Receivable – Crystal Hotel 9,000

Laundry income 9,000
~ Service performed on account ~

10 Laundry Supplies 3,000

Accounts Payable – Robinsons 3,000
~ Bought laundry supplies on account ~

15 Accounts Receivable – D&G Coffee Shop 11,000

Laundry Income 11,000
~ Service performed on account ~

Salaries and Wages 8,400

Cash 8,400
~ Paid salaries of driver and laundry employee ~

20 Cash 9,900
Accounts Receivable – Crystal Hotel 4,500
Accounts Receivable – D&G Coffee Shop 5,400
~ Collection of accounts receivable ~

25 Cash 4,400
Laundry Income 4,400
~ Service performed for cash ~

Accounts Payable – Robinsons 1,800

Cash 1,800
~ Payment of accounts payable ~

Brian Aguila, Drawing 2,000

Cash 2,000
~ Withdrew cash for personal use ~

27 Repairs and Maintenance 1,700

Cash 1,700
~ Paid repair of laundry equipment ~

31 Salaries and Wages 8,400

Electricity and Water 3,700
Cash 12,100
~ Paid salaries of employees, electricity, and water ~

Cash 5,200
Accounts Receivable – Crystal Hotel 7,600
Laundry Income 12,800
~ Services performed for cash and on account ~

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GENERAL LEDGER

Cash AccountsReceivable Laundry Supplies

Dr Cr Dr Cr Dr Cr
3/1 30,000 3/2 1,600 3/6 9,000 3/20 4,500 3/1 5,000
3/6 8,000 3/2 6,000 3/15 11,000 3/20 5,400 3/10 3,000
3/20 9,900 3/15 8,400 3/31 7,600 -----------------
3/25 4,400 3/25 1,800 ----------------- ---------------- 8,000
3/31 5,200 3/25 2,000 27,600 9,900
3/27 1,700 ----------------- ----------------
3/31 12,100 17,700
------------------ -----------------
57,500 33,600
------------------ -----------------
23,900 Laundry Equipment Delivery Vehicle
Dr Cr Dr Cr
3/1 82,000 3/2 240,000
----------------- -----------------
82,000 240,000

Accounts Payable Brian Aguila, Capital Brian Aguila, Drawing

Dr Cr Dr Cr Dr Cr
3/25 1,800 3/2 240,000 3/1 117,000 3/25 2,000
3/10 3,000 ----------------- ----------------
------------------ ----------------- 117,000 2,000
1,800 243,000
------------------ -----------------
241,200

Laundry Income Rent Expense Taxes and Licenses

Dr Cr Dr Cr Dr Cr
3/6 8,000 3/2 6,000 3/2 1,600
3/6 9,000 ---------------- ----------------
3/15 11,000 6,000 1,600
3/25 4,400
3/31 12,800
-----------------
45,200

Salaries and Wages Electricity and Water Repairs and Maintenance

Dr Cr Dr Cr Dr Cr
3/15 8,400 3/31 3,700 3/27 1,700
3/31 8,400 ---------------- ----------------
----------------- 3,700 1,700
16,800

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 Trial balance is a list of all the general ledger accounts and their ending balances
at a given time. Customarily, a trial balance is prepared at the end of an accounting
period. The accounts are listed in the order in which they appear in the ledger with
debit balances listed in the left column and credit balances in the right column. The
totals of the two columns must be in agreement. The primary purpose of a trial
balance is to prove the mathematical equality of debits and credits after posting.
Steps in Preparing Trial Balance:
o Determine the ending balance of each account in the ledger.
o Put the debit balance of the ledger account in the debit column of the trial
balance and credit balance of the ledger in the credit column of the trial
balance.
o Add each column.
o Compare the totals of each column.

B.A. Laundry Shop

Trial Balance
March 31, _____
Account Titles Debit Credit
Cash…………………………….. 23,900
Accounts Receivable…………… 17,700
Laundry Supplies………….…… 8,000
Laundry Equipment………….… 82,000
Delivery Vehicle………………… 240,000
Accounts Payable……………… 241,200
Brian Aguila, Capital…………… 117,000
Brian Aguila, Drawing…………. 2,000
Laundry Income……………….. 45,200
Rent Expense………………….. 6,000
Taxes and Licenses……………. 1,600
Salaries and Wages…..……….. 16,800
Electricity and Water…………… 3,700
Repairs and Maintenance…….. 1,700
Totals 403,400 403,400

 Locating Errors
A basic rule of double-entry accounting is that for every credit there must be an
equal debit amount. From this concept, one can say that the sum of all debits must
equal the sum of all credits in the accounting system. If debits do not equal credits,
then an error has been made. The trial balance is a tool for detecting such errors.
Errors are unintentional mistakes such as mathematical or clerical
mistakes, oversights or misinterpretations of facts. Errors may happen at the
recording stage, posting stage, or at the preparation of the trial balance.

 Kinds of Error
o Transposition – An error caused by switching the position of two adjacent
digits. For example, if the number 483 is written as 843.
o Slide – An error in which the entire number is moved one or more spaces
to the right or the left. For example, if the number 257.00 is written as 25.70.
o Omission – A transaction is omitted completely from the books so that
there is no debit and credit entry of the transaction. For example, Drawing
of ₱5,000 cash by the proprietor was not recorded. This type of error cannot
be discovered in the trial balance.
o Principle – An entry is made to the correct amount and appropriate side
but in the wrong class of account. For example, Repairs to building ₱4,000
was debited to the Building Account. This error will not disturb the equality
of the trial balance.

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o Commission – This error may be committed at the time of recording and/or

posting. At the time of recording, the wrong amount may be recorded in
journal which will be carried throughout. Such error will not affect the
agreement of the trial balance. This error may also be committed at the time
of posting, by way of posting wrong amount, to the wrong side of an account,
or in the wrong account. The error resulting in posting to wrong side will
result disagreement of trial balance, whereas, posting to wrong account will
not affect the agreement of trial balance. For example, an amount of
₱20,000 received from customer is correctly recorded as debit to cash
account and credit to accounts receivable but while posting, the accounts
receivable account is credited with ₱2,000. This is an error, which is
committed at the time of posting, by posting wrong amount to the account.
This will result in disagreement of trial balance, since, the credit total of the
trail balance will be short by ₱18,000.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Apr.5 Cash 8,000
Anna Santos, Capital 8,000
~ Cash investment of owner in the business ₱80,000 ~
8 Cash 9,000
Rent Expense 9,000
~ Payment of office's rent ₱9,000 ~
12 Office Equipment 25,000
Accounts Payable - Ace Company 25,000
~ Purchase of office equipment from Ace Company on
account ₱25,000 ~
15 Advertising Expense 3,000
Cash 3,000
~ Payment of advertising cost in
Manila Bulletin ₱3,000 ~
20 Cash 18,000
Service Fees 18,000
~ Receipt of cash from services rendered ₱18,000 ~
25 Accounts Receivable – Ricky Gonzales 16,000
Service Fees 16,000
~ Income from services rendered to
Ricky Gonzales on account ₱16,000 ~
29 Salaries Expense 4,800
Cash 4,800
~ Payment of assistant's salary ₱4,800 ~
30 Cash 11,000
Service Fees 11,000
~ Collection of account from Ricky Gonzales ₱11,000 ~

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GENERAL LEDGER
(T-Account)

Cash AccountsReceivable Office Equipment

Dr Cr Dr Cr Dr Cr
8,000 3,000 16,000 25,000
9,000 4,800
18,000
11,000
46,000 7,800
38,200

Accounts Payable Anna Santos, Capital Service Fees

Dr Cr Dr Cr Dr Cr
52,000 8,000 18,000
16,000
11,000
45,000

Rent Expense SalariesExpense Advertising Expense

Dr Cr Dr Cr Dr Cr
9,000 4,800 300

A.S. Travel Agency

Trial Balance
April 30, _____
Incorrect Correct
Account Titles Debit Credit Debit Credit
Cash 38,200 92,200
Accounts receivable 16,000 5,000
Office equipment 25,000 25,000
Accounts payable 52,000 25,000
Anna Santos, capital 8,000 80,000
Service fees 45,000 34,000
Rent expense 9,000 9,000
Salaries expense 4,800 4,800
Advertising expense 300 3,000
Totals 84,300 114,000 139,000 139,000