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ACCTG 101 – FUNDAMENTALS OF ACCOUNTING PARTS 1 & 2

MODULE

LESSON 3
RECORDING BUSINESS TRANSACTIONS

Learning Outcomes
 List and explain the sequential steps in the accounting cycle.
 Understand and develop the ability to use the books of accounts.
 Apply the rules of debits and credits in analyzing business transactions.
 Prepare journal entries and post to ledger accounts using double-entry accounting
procedures.
 Develop chart of accounts.
 Prepare and explain the use of a trial balance.

Introduction
The purpose of this module is for the learners to be familiar and understand the
accounting cycle process. The focus of this module is the first few steps of the accounting
cycle from transaction analysis up to preparation of unadjusted trial balance. To complete
this module, you will need to study all of the content pages and successfully complete the
related topics and module exercises and activities.

Lecture Notes / Lesson Content

Accounting Cycle
Accounting cycle is a process of a complete sequence of accounting procedures in
appropriate order during each accounting period. Accounting process is a combination of
a series of activities that begin when a transaction takes place and ends with its inclusion
in the financial statements at the end of the accounting period.
The sequence of accounting procedures used to record, classify and summarize
accounting information is often termed the Accounting Cycle. The term indicates that
these procedures must be repeated continuously to enable the business to prepare new up-
to-date financial statements at reasonable intervals.

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Lungsod ng Batangas
Colegio ng Lungsod ng Batangas
Contact No. (043) 402-1450

I. Identification of Events to be Recorded

Events are analyzed to find the impact on the financial position or to be more
specific the impacts on the accounting equation. Documents such as; a receipt, an invoice,
a depreciation schedule, and a bank statement, etc. provide evidence that an economic
event has actually occurred. The analysis of transactions should follow these four basic
steps:
1. Identify the transaction from source documents.
2. Indicate the accounts - either assets, liabilities, quity, income or expenses -
affected by the transaction.
3. Ascertain whether each account is increased or decreased by the transaction.
4. Using the rules of debit and credit, determine whether to debit or credit the
account to record its increase or decrease.

Source Documents
Source documents are the physical basis upon which business transactions
are recorded. Source documents are typically retained for use as evidence when auditors
later review a company's financial statements, and need to verify that transactions have,
in fact, occurred. They usually contain the following information:
a) A description of a business transaction
b) The date of the transaction
c) A specific amount of money
d) An authorizing signature
Many source documents are also stamped to indicate an approval, or on which to
write down the current date or the accounts to be used to record the underlying
transaction. A source document does not have to be a paper document. It can also be
electronic, such as an electronic record of the hours worked by an employee, as entered
into a company's timekeeping system through a smartphone.

II. Transactions are Recorded in the 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.
There are two types of journals, the general journal and the special journal.

General Journal
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:
• 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.

Shown below is an example of a general journal

page 1
Date Account Titles and Explanation P.R. Debit Credit
2019
Sep 25 Cash 411,000
Castillo, Capital 411,000
Initial investment

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

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

c. 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.
d. 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.
e. 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.
f. The column titled P.R. (which stands for Posting 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.

Simple and Compound Entry

In a simple entry, only two accounts are affected - one account is debited and the
other account credited. However, some transactions require the use of more than two
accounts. When three or more accounts are required in a journal entry, the entry is
referred to as a compound entry.

III. Journal Entries are Posted to the Ledger

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’. There are two kinds of
ledgers, namely; the general ledger and the subsidiary ledgers.

General Ledger
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. : 101
Date Item J.R. Debit Credit Balance

a. The account portion refers to the account title for example: cash, accounts receivable.
b. The account number is an assigned number for each account title to facilitate ease in
recording and cross-referencing.
c. The Date column identifies when the transaction happened.
d. The item represents the source journal and the nature of the transactions
e. The Journal Reference identifies the page number of the general our special journal
from which the information was taken.
f. The Debit and Credit columns are used in recording the amount of transactions from
the general journal or special journal.
g. 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.

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Lungsod ng Batangas
Colegio ng Lungsod ng Batangas
Contact No. (043) 402-1450

The accounts in the general ledger are classified into two general groups:
1. Balance sheet or permanent or real accounts (assets, liabilities and owner’s equity).
2. Income statemetn or temporary accounts (income and expenses). Temporary or
nominal accounts are used to gather information for a particular accounting period.
At the end of the period, the balances of these accounts are transferred to a
permanent owner’s equity account.

Chart of Accounts
Chart of accounts is simply a list of account names that a company uses in its
general ledger for recording various business transactions. It provides guidance to book-
keepers, accountants or other relevant persons in using specific account names while
entering transactions in journal and posting them to ledger.
There is no common structure or template of chart of accounts available for the
use of all types of businesses. Each company prepares its own chart of accounts
depending on its individual requirements. The structure of a chart of accounts is normally
as complex as the business structure of the company. For example, the type and number
of accounts needed by a large corporation would significantly differ from those needed
by a small retailer. Similarly many accounts that are essential in manufacturing
businesses are not used by merchandising companies.
The type and number of accounts used in a chart of accounts depends on a
number of factors such as the nature and volume of business carried on by the company,
the need of internal management for making important business decisions and the need of
external parties who use financial statements of the company for various purposes.
The account names are listed in the chart of accounts in the same order in which they
appear in company’s financial statements. Usually, the balance sheet accounts (i.e., assets,
liabilities and owner’s equity) are listed first and income statement accounts (i.e., revenue
and expense) are listed later.

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Colegio ng Lungsod ng Batangas
Contact No. (043) 402-1450

Posting
Posting means transferring amounts from the journal to the appropriate accounts
in the ledger. Debits in the journal are posted as debtis in the ledger, and credits in the
journal as credits in the ledger. The steps of posting are as follows:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference column of the
ledger.
3. Post the debit figure from the journal as a debit figure in the ledger and the credit
figure from the journal as a credit figure in the ledger.
4. Enter the account number in the posting reference column of the journal once the
figure has been posted to the ledger.

Ledger Accounts after Posting

At the end of an accounting period, the debit and credit balance of each account
must be determined to enable us to come up with a trial balance.
 Each account balance is determined by footing (adding) all the debits and credits.
 If the sum of an account’s debits is greater than the sum of its credits, that account
has a debit balance.
 If the sum of credits is greater, that account has a credit balance.

IV. Preparation of a Trial Balance

A trial balance is a bookkeeping worksheet in which the balance of all ledgers are
compiled into debit and credit account column totals that are equal. A company prepares
a trial balance periodically, usually at the end of every reporting period. The general
purpose of producing a trial balance is to ensure the entries in a company's bookkeeping
system are mathematically correct. The procedures in the preparation of a trial balance
follow:
1. List the account titles in numerical order.
2. Obtain the account balance of each account from the ledger and enter the debit
balances in the debit column and credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.

Locating Errors
An inequality in the totals of the debits and credits would automatically signal the
presence of an error. These errors include:
a) Error in posting a transaction to the ledger.
b) Error in determining the account balances.
c) Error in preparing the trial balance.

Steps to locate Error in Trial Balance

1. Prove the addition of the trial balance columns by adding these columns in the
opposite direction.
2. If the error does not lie in addition, determine the exact amount by which the trial
balance is out of balance. The amount of the discrepancy is often a clue to the source
of error. If the discrepancy is divisible by 9, this suggests either a
transposition( reversing the order of numbers) error or slide (moving of the decimal
point).
3. Compare the accounts and amounts in the trial balance with that in the ledger. Be
certain that no account is omitted.
4. Recompute the balance of each ledger account.
5. Trace all postings from the journal to the ledger accounts.

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Lungsod ng Batangas
Colegio ng Lungsod ng Batangas
Contact No. (043) 402-1450

The following errors are not detected by a trial balance:

a. Failure to record or post a transaction.
b. Recording the same transaction more than once.
c. Recording an entry but with the same erroneous debit and credit amounts.
d. Posting a part of transaction correctlt as a debit or credit but to the wrong account.

Summary
 Common accounting cycle involves 10 steps from analyzing transaction to
preparation of reversing entries.
 There are two books of accounts - the journal and the ledger.
 Journal entries can be a simple or compound entry.
 A chart of accounts (COA) is a financial organizational tool that provides a complete
listing of every account in the general ledger of a company, broken down into
subcategories. It is used to organize finances and give interested parties, such as
investors and shareholders, a clearer insight into a company’s financial health. To
make it easier for readers to locate specific accounts, each one typically contains a
name, brief description, and an identification code.
 A trial balance is a worksheet with two columns, one for debits and one for credits,
that ensures a company’s bookkeeping is mathematically correct.
 The debits and credits include all business transactions for a company over a certain
period, including the sum of such accounts as assets, expenses, liabilities, and
revenues.
 Debits and credits of a trial balance being equal ensure there are no mathematical
errors, but there could still be mistakes or errors in the accounting systems.

References

Book Reference
 Ballada, W., &; Ballada, S. (n.d.). Basic Accounting (20th ed.). DomDane.

Website Links
 Bragg, S. (2019, May 21). Source documents. Retrieved July 31, 2020, from
https://www.accountingtools.com/articles/what-are-source-documents-in-
accounting.html
 Madebo, M., Biaso, Etefa, W., Charles, S., Dhine, K., Dorothty, . . . Malueth, L.
(2019, September 24). Chart of accounts. Retrieved July 31, 2020, from
https://www.accountingformanagement.org/chart-of-accounts/

Youtube Channels
 Filipino Accounting Tutorial
 COB Channel
 Accounting Stuff

Prepared by:

Ms. Maria Corazon C. Castillo, CPA, MBA

Contact No.: 09171620148
Email Address: [email protected]