Recording

Business
transactions
Topic 3
Objectives:
At the end of the lesson, the students should be able to:
1. List and explain in brief the sequential steps in the accounting cycle.
2. Identify the general journal as the book of original entry.
3. Detail the standard contents of the general journal.
4. Outline the steps in analyzing transactions and state the role of source documents.
5. Analyze the impact of transactions on the elements and the specific accounts.
6. Apply the rules of debits and credits in analyzing business transactions.
7. Journalize transactions in proper form.
8. Describe a general ledger and understand what purpose it serves.
9. Post entries from the general journal to the general ledger.
10. Distinguish between permanent and temporary accounts.
11. Develop a chart of accounts.
12. Prepare and explain the use of a trial balance.
13. Perform steps in locating and correcting errors.
Accounting Cycle
During the Step 1: Identification of events to be recorded
accounting
period Step 2: Transactions are Recorded in the Journal
Step 3: Journal entries are posted to the ledger
Step 4: Preparation of a Trial balance
At the end Step 5: Preparation of the Worksheet including Adjusting Entries
of the
accounting
Step 6: Preparation of the Financial Statements
period Step 7: Adjusting Journal Entries are Journalized and Posted
Step 8: Closing Journal Entries are Journalized and Posted
Step 9: Preparation of a Post-Closing Trial Balance
At the start
of the next
Step 10: Reversing Journal Entries are Journalized and Posted
period
 The General Journal
(the book of original entry) Ledger
Office Equipment
Cash xx Cash
Accounts payable xx
Office
Equipment

Accounts
Payable

Trial Balance

Assets
Liabilities
Owner’s Equity
Revenues
Expenses
 A chronological record of the entity’s transactions.

The Journal Shows the effects of a business transaction in terms

of debits and credits.

Assume that Dr. Besario established her own wedding consultancy with
an initial investment f P250,000 on May 1.
Date Account Titles and Explanation P.R. Debit Credit
1 2020

2 May 1 Cash 250,000

3 Besario, Capital 250,000

4 Initial investment.

5
The
journal
After the transaction has been identified and measured,
it is recorded in the journal. The process of recording is
called journalizing. The double-entry system is used,
which means that:
● Two or more accounts are affected by each
transaction.
● The sum of the debits for every transaction equals the
sum of the credits.
● The equality of the accounting equation is always
maintained.
Initial investment (source of assets)
May 1. Dr. Rose Besario is a social entrepreneur from the South. She decided to
organize her wedding consultancy and invested P250,000 into this entity.

Debit Credit

Cash (A) 250,000

Besario, Capital (OE) 250,000

ledger
RENT PAID IN ADVANCE (exchange of
assets)
May 1. Rented office space and paid two months’ rent in advance, P8,000.

Debit Credit

Prepaid Rent (A) 8,000

Cash (A) 8,000

ledger
Note issued for cash (source of assets)

May 2. Rose Besario issue d a promissory note for a P210,000 loan from Metrobank. This
availment will be used for the acquisition of a service vehicle. The note carries a 20%
interest per annum. The arrangement with the bank is that both the interest and the
principal are payable in full in one year.

Debit Credit

Cash(A) 210,000

Notes Payable (L) 210,000

ledger
May 2. Hired an office assistant ad an account executive each with a P7,800
monthly salary, Or, each is to receive P300 per day for the 26-day work month.
No entry is necessary at this point. They started work immediately.
Service vehicle acquired for cash
(exchange of assets)
May 4. Acquired service vehicle for P420,000.

Debit Credit

Service Vehicle (A) 420,000

Cash (A) 420,000

ledger
Insurance premiums paid (exchange of
assets)
May 4. Paid Prudential Guarantee and Assurance, Inc. P14,400 for a one-
year comprehensive insurance coverage on the service vehicle.

Debit Credit

Prepaid Insurance (A) 14,400

Cash (A) 14,400

ledger
Office equipment acquired on account (exchange
and source of assets)
May 5. Acquired office equipment from Fair and Square Emporium for P60,000;
paying P15,000 in cash and the balance next month.
Note: A compound entry is needed for this transaction.

Debit Credit

Office Equipment (A) 60,000

Cash (A) 15,000

Accounts Payable (L) 45,000

Supplies purchased on account (source of
assets)
May 8. Purchased supplies on credit for P18,000 from San Jose
Merchandising.

Debit Credit

Supplies (A) 18,000

Accounts Payable (L) 18,000

Accounts payable partially settled (Use of
assets)
May 9. Paid San Jose Merchandising P10,000 for the amount owed.

Debit Credit

Accounts Payable (L) 10,000

Cash (A) 10,000

Revenues earned and cash collected
(source of assets)
May 10. Coordinated and finalized simple bridal arrangements for three couples
and collected fees of P8,800 per couple. Service include prospecting and
selecting the church and reception location, couturier, caterer car service,
flowers, souvenirs and invitations.
Debit Credit

Cash (A) 26,400

Consulting Revenues (OE:I) 26,400

Salaries paid (use of assets)
May 13. Paid salaries P6,600. The entity pays salaries every two
Saturdays.

Debit Credit

Salaries Expense (OE:E) 6,600

Cash (A) 6,600

Unearned revenues (source of assets)
May 15. The entity is earning additional revenues by referring consulting clients
to friendly hotels, caterers, printers, couturiers. Received P10,000 advance fees
for three clients referred.

Debit Credit

Cash (A) 10,000

Unearned Referral Revenues (L) 10,000

Revenues earned on account (Source of
assets)
May 19. Coordinated and finalized elaborate bridal arrangements for three couples and
billed fees of P12,000 per couple. Additional services include documents preparation,
consultation with a feng shui expert as to the ideal wedding date for prosperity and
harmony, provision for limousine service and honeymoon trip.

Debit Credit

Accounts Receivable (A) 36,000

Consulting Revenues (OE:I) 36,000

Withdrawal of cash by owner (use of
assets)
May 25. Besario withdrew P14,000 for personal expenses.

Debit Credit

Besario, Withdrawals (OE) 14,000

Cash (A) 14,000

Salaries paid (use of assets)
May 27. Paid salaries, P7,200.

Debit Credit

Salaries Expense (OE:E) 7,200

Cash (A) 7,200

Expenses incurred but unpaid (exchange
of claims)
May 30. Received the ICC-Bayan Tel telephone bill, P1,400.

Debit Credit

Utilities Expense (OE:E) 1,400

Utilities Payable (L) 1,400

Accounts receivable partially collected
(Exchange of assets)
May 30. Received P24,000 from two clients for services billed last May
19.

Debit Credit

Cash (A) 24,000

Accounts Receivable (A) 24,000

Expenses incurred and paid (use of
assets)
May 31. Settled the electricity bill of P3,000 for the month.

Debit Credit

Utilities Expense (OE:E) 3,000

Cash (A) 3,000

Chart of
accounts
A listing of all the accounts and their numbers in
the ledger.
Arranged in the financial statement order, Assets,
Liabilities, Owner’s Equity, Income and Expense.
The
ledger
A grouping of the entity’s accounts, the ledger is
the reference book of the accounting system and
is used to classify and summarize transactions,
and to prepare data for basic financial statements.

Permanent accounts and Temporary

accounts
posting
Transferring the amounts from the journal to
the appropriate accounts in the ledger.

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 (JR)
Column of the ledger.
3. Post the debit figure from the journal as a
debit figure in the ledger, and the credit
figures in 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 the accounting period, the debit
or credit balance of each account must be
determined to enable is 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.
● Of the sum of its credits is greater, the
account has a credit balance.
Reference
entries
May 1 Initial investment (source of
assets)
May 1 RENT PAID IN ADVANCE
(exchange of assets)
May 2 Note issued for cash (source of
assets)
May 4 Service vehicle acquired for cash
(exchange of assets)
May 4 Insurance premiums paid
(exchange of assets)
Trial Balance
A list of all accounts with their respective debit or credit balances. It is prepared to verify the
equality of debits and credits in the ledger at the end of each accounting period or at any time
postings are updated.

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 the credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.

A trial balance in balance is a proof of the accuracy of the records but it does not signify the
absence of errors.
Locating errors
Error in posting a transaction to the ledger:
 An erroneous amount was posted to the account
 A debit entry was posted as a credit or vice versa
 A debit or credit posting was omitted

Error in determining the account balances:

 A balance was incorrectly computed
 A balance was entered in the wrong balance column

Error in preparing the trial balance:

 One of the columns of the trial balance was incorrectly added.
 The amount of an account balance was incorrectly.
 A debit balance was recorded on the trial balance as a credit or vice versa, or a balance was
omitted entirely.
Locating errors
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. If the discrepancy is divisible by 9, this suggests either a transposition error
or a slide.
○ Transposition error – reversing the order of numbers
○ Slide – moving of the decimal point
3. Errors recording a debit in a credit column or vice versa shows a difference of
double of the amount. Scan the columns for an amount equal to ½ of the
discrepancy.
4. Scan for amounts equal to the discrepancy for errors of omission.
5. Compare the accounts and the amounts in the TB and in the ledger.
6. Recompute the balance of each ledger account.
7. Trace all postings from the journal to the ledger. Place a check mark in the
journal and in the ledger after each figure is verified. Look for unchecked
amounts.
note

Even when a trial balance is in balance, accounting records may still contain
errors. These errors include:
1. Failure to record or post the transaction.
2. Recording the same transaction more than once.
3. Recording an entry but with the same erroneous debit and credit amounts.
4. Posting a part of a transaction correctly as debit or credit but to the wrong
account.
End