Recording Business Transactions

 

PAGE 1 UNIVERSIDAD DE STA. ISABEL

Elias Angeles St., Naga City REVIEW ON BASIC ACCOUNTIN ACCOUNTING G LESSON NO 2. RECORDING BUSINESS TRANSACTION TRANSACTION  ACCOUNTING  ACCOUNTIN G CYCLE. It refers to a series of of sequential ste steps ps or procedures procedures performed to accomplish accomplis h the accounting process. 1. Identifica Identification tion of the the Events Events to be be Record Recorded ed  Aim : To gather information information about transactions transactions or events events generally through through the source documents.   2. Transact Transactions ions are Recorde Recorded d in the Journal Journal  Aim : To record the economic economic impact impact of transactions on the the firm on a journal, journal, which is a form that facilitates transfer to the accounts. 3. Journa Journall Entries Entries are are Post Posted ed to the the Ledger  Ledger   Aim : To transfer the information information from the journal journal to the ledger ledger for classification. classification.   4. Prepar Preparati ation on of Tria Triall Bala Balance nce  Aim : To provide a listing listing to verify the equality equality of debits debits and credits in the ledger. 5. Preparat Preparation ion of the the Workshe Worksheet et includin including g Adjusting Adjusting Entries Entries  Aim : To aid in the preparation preparation of financial financial statements. statements.   6. Prepar Preparati ation on of Financ Financial ial State Statemen ments ts  Aim : To provide useful useful information to decision decision make makers. rs.   7. Adjusting Adjusting Journa Journall Entries Entries are are Journal Journalized ized and and Posted Posted  Aim : To record the accruals, accruals, expirati expiration on of deferrals, estimations estimations and other other events from the worksheet.   8. Closing Closing Journa Journall Entries Entries are Journa Journalized lized and Posted Posted  Aim : To close temporary temporary accounts and and transfer to profit to owner’s owner’s equity.   9. Preparat Preparation ion of Post-C Post-Closin losing g Trial Trial Balance Balance  Aim : To check the equality equality of debits and and credits after the closing closing entries. entries.   10. Reversing Entries Entries and Journalized Journalized and Posted. Posted.  Aim : To simplify the recording recording of certain certain regular transactions transactions in the next next accounting period.

The General Journal (the book of original entry) Office Equipment   Cash

Shows all the effects of a transaction in terms of debits and credits.

xx xx

The Ledger   A grouping of accounts which which is used to classify and summarize transactions and to prepare data for basic financial statements.

Cash

 

PAGE 2 Office Equipment

Trial Balance  Assets Listing of all ledger accounts, Liabilities in order, with their respective SOURCE DOCUMENTS Owner’s Equity debit or credit balances. Revenues 1. Transactio Transactions ns and events events are the startin starting g point in the accoun accounting ting process process.. Expenses 2. Source Source docume documents nts ident identify ify and describ describe e transa transacti ction ons s an and d events events en enter terin ing g the accoun accountin ting g process. 3. Thes These e so sour urce ce docu docume ment nts s co cont ntai ain n info inform rmat atio ion n abou aboutt th the e natu nature re and and amou amount nts s of th the e transaction.

THE JOURNAL 1. 2. 3. 4. 5.

The journal is a chronological record of the entity’s transactions. A journal entry shows the effects of a business transaction in terms of debits and credits. Each transaction transaction is initially records records in in a journal journal rather rather than directly in in the ledger. ledger. It is ca call lled ed th the e book of original entry. The general journal is the simplest journal.

FORMAT OF THE GENERAL JOURNAL

  1 2 3 4

Date 2020 1-May

  Journal Account Titles and Explanation

Cash SJK, Capital Initial investment.

page 1

P.R.

Debit

Credit

250,000.0 0 250,000.0 0

The standard contents are as follows: 1. Date. The year and month are not rewritten every entry unless the year or month changes or  a new page is needed. 2. Account Titles and Explanation.  Explanation.   The account account to be debited is entered entered at at the extreme left of the first line while while the account to be credit credit is entered slightly slightly indented on the next line. A brief description description of the transaction is usually usually made on the liline ne below the credit. credit. Generally, skip a line after each entry. 3. P.R. (Posting Reference). Reference). This will be used when the entries are posted, that is, until the amounts are transferred transferred to the related ledger accounts. accounts. The posting will be described described later. 4. Debit. The debit amount for each account is entered in this column. 5. Credit. The credit amount for each account is entered in this column. SIMPLE AND COMPOUND ENTRY 1. In simple simple entry, entry, only two account accounts s are affected affected – one account account is debite debited d and one accoun accountt is credited. 2. In compoun compound d entry, entry, three three or more accounts accounts are affecte affected. d.

 

PAGE 3 TRANSACTIONS ARE JOURNALIZED (Step 2) 1. After the transaction transaction or event has been identified and measured, measured, it is recorded recorded in the journal. journal. 2. The proce process ss of record recording ing a transacti transaction on is called called journalizing.  journalizing.

THE LEDGER 1. A groupin grouping g of the entity’s entity’s accou account nt is refer referred red to as the the ledger. 2. A general ledger   is is the “reference book” of the accounting system and is used to classify and summarize transactions, transactions, and to prepare data for the basic financial statements. statements. 3. The accoun accounts ts in the general general ledge ledgerr are classifi classified ed into two two groups: groups: a. Balan Balance ce Sheet Sheet or Perman Permanent ent or Real Real Accoun Accounts. ts. This refers to assets, liabilities and owner’s equity. b. Income Income Statem Statement ent or Tempora Temporary ry or Nomin Nominal al Account Accounts. s.   This refers to income and expenses.   expenses. 4. Each account account has its its own own records records in the the ledge ledger. r. CHART OF ACCOUNTS 1. A listing listing of all the accoun accounts ts and their their account account numbers numbers in the ledge ledgerr is known as the the chart of  2. accounts. The The char chartt   is arra arrang nged ed in the the fina financ ncia iall stat statem emen entt orde order, r, th that at is is,, asse assets ts fi firs rst, t, fo foll llow owed ed by liabilities, owner’s equity, revenues and expenses. 3. The The ac acco coun unts ts shou should ld be numb number ered ed in a flex flexib ible le mann manner er to perm permit it inde indexi xing ng and and cr cros osssreferencing.

 

PAGE 4

POSTING (Step 3) 1. Posting means transferring the amounts from the journal to the appropriate accounts in the ledger. 2. Debits Debits in the journal journal are posted posted as debits debits in the ledger ledger and credits credits in the journal journal as credits credits in the ledger. Journ al   1

  Account Titles and Explanation

Date 2020

2

page 1

1-May

P.R.

250,000. 00

SJK, Capital

4

Credit

250,000. 00

Cash

3

Debit

Initial investment.

The Ledger  Account No.

Account: Cash  

Date

1

2020

2

1-May

Explanaon Inal investment

J.R.

Debit

J-1

250,000.00 Account No.

Account: SJK, Capital  

Date

1 2

2020 1-May

Credit

Explanaon

J.R.

Inal investment

Debit

J-1

Credit 250,000.00

Illustration of T- Account: Cash May 1

250,000.00

May 1

8,000.00

2

210,000.00

4

420,000.00

10

26,400.00

4

14,400.00

15

10,000.00

5

15,000.00

30

24,000.00

9

10,000.00

13

6,600.00

25

14,000.00

27

7,200.00

110 Balance

310 Balance

 

PAGE 5 31 520,400.00 Balanc e

3,000.00 498,200.00

22,200.00

TRIAL BALANCE (Step 4) 1. The trial balance is balance is a list of all accounts with their respective debit or credit balances. 2. It is prepared prepared to verify verify the equal equality ity of debits debits and credit credits s in the ledg ledger er at the end of each accounting period or at any time the postings are updated. 3. The procedu procedures res in the prepa preparatio ration n of the trial trial balance balance follow: follow: a. List all the accounts accounts in numer numerical ical order. order. b. Obtain Obtain the account account balance balance of each each account account from the the ledger ledger and enter enter the balances balances in the debit or credit balances in the credit column. c. Add Add the the debi debitt and and cred credit it colu columns mns.. d. Comp Compar are e the the tot total als. s. 4. The trial trial balance balance is a control control device device that helps helps minimize minimize accoun accounting ting errors. errors.

 

PAGE 6

EXERCISES PROBL PR OBLEM EM 1 DEBIT DEBITS S AND AND CRED CREDITS ITS Innovative Designs, Designs, owned by Felipe Niza Niza Jr., has been operating for two yea years. rs. Below is a series of transactions. Required: For each transaction, transaction, indicate the accounts that shou should ld be debited and credi credited. ted. It no journal entry is required, write “N/A’ in the columns. Use the following accounts: Cash Notes Payable  Account Receivable Receivable Salaries Payable Supplies Noza, Capital Prepaid Expenses Niza, Withdrawals 

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a. b. c. d. e. f. g. h.

Equipment Patents  Accounts Payable Payable

Transactions Purchase Purchased d equ equipm ipment ent fo forr use iin n the busin business; ess; paid paid o one ne third cash and gave a note payable for the balance. Pa Paid id cash cash fo forr sal salar arie ies. s. Collecte Collected d ca cash sh fo forr ser services vices perform performed ed this this perio period. d. Collecte Collected d cas cash h for services services p perfo erforme rmed d last last period. period. Performe Performed d servic services es this this p perio eriod d on on credit credit.. Pai Paid d ope opera ratin ting g expens expenses es in incur curre red d in this this per period iod.. Paid cash for for operat operating ing e expe xpenses nses in incur curred red last last per period. iod. Incurre Incurred d operati operating ng expen expenses ses this this per period iod to be paid paid ne next xt period.

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Service Revenue Operating Expenses

Debit

i.

Purchase Purchased d su suppli pplies es for for iinven nventor tory y to be u used sed late later, r, p paid aid cash.  j. Used some supplies supplies from inventory to operatio operations. ns. k. Purcha Purchase sed d a paten patent; t; paid paid cas cash. h. l. Made Made a paym paymen entt on the the e equ quipm ipmen entt no note te in (a) (a);; the the payment was part principal and interest. m. Collecte Collected d cash on ac accoun countt recei receivabl vable e for services services previously performed. n. Paid cash on on accoun accounts ts payable payable for expen expenses ses previo previously usly incurred. o. On the the last last day of curre current nt perio period, d, pa paid id ca cash sh for an insurance policy covering 12 months.

PROB PR OBLE LEM M2

CLAS CLASSI SIFI FICA CATI TION ON O OF F ACCO ACCOUN UNTS TS

The following ledger accounts are used by Cardo Dalisay Repair Shop: a. Cash b. Sa Sala lari ries es Ex Expe pens nse e

c. Acco Accoun untt Rece Receiv ivab able le d. Dali Dalisa say, y, Capi Capita tall

Credit

 

PAGE 7 e. f. g. h. i.  j. k. l. m. n.

o. p. q. r. s. t. u. v. w.

Se Serv rvic ice e Rev Reven enue ues s Prepaid Rent Ac Acco coun unts ts Paya Payabl ble e Land Supplies Ex Expense Prepaid Insurance Insurance Util Utilit itie ies s Exp Expense ense Service Re Revenues Dal Dalisa isay, y, Wit Withd hdra rawal wals s Sa Sala lari ries es Pa Paya yabl ble e

Requ Re quire ired: d:

Unea Unearn rned ed Rev even enue ue Of Offi fice ce Equi Equipm pmen entt Rent P Pa ayable Note Notes s Rec Receiv iva abl ble e In Inte tere rest st Expe Expens nse e Notes Pa Payable Supplies In Inte tere rest st Rece Receiv ivab able le Rent Rent E Exp xpe ense

Indica Indicate te each each accou account’ nt’s s class classifi ificat catio ion n and normal normal balanc balance e by plac placing ing (/) mark marks. s. Type of Account

 Asset

Liabilities Dalisay, Capital

Owner’s Equity Equity Dalisay, Revenue Withdrawals

Normal Balance Expense

Debit

Credit

a. b. c. d. e. f. g. h. i.  j. l. m . n. o. p. q. r. s. t. w.

PROBLEM PROB LEM 3 JOURNALI JOURNALIZING, ZING, POSTING POSTING AND PREPARA PREPARATION TION OF TRIAL BALANC BALANCE E The Chart of Accounts for Juanita Pineda Delivery Services is as follows:  Assets Income 110 Cash 410 Delivery Revenues 120 Account Receivable Expenses 130 Prepaid Insurance 510 Salaries Expenses 140 Service Vehicle 520 Gasoline and Oil Expenses 150 Office Equipment 530 Repairs Expense Liabilities 540 Advertising Expense 210 Accounts Payable 550 Supplies Expense Owner’s Equity 590 Miscellaneous Expense 310 Pineda, Capital 320 Pineda, With thd drawals The company completed the followin f ollowing g transactions in May 2020: May 3 6

Plac Placed ed four we week-en ek-end d advert advertisem isements ents in th the e Sun Daily ffor or Php 18, 18,500.00 500.00;; the amou amount nt is due in 30 day days. s. Bough Boughtt supplie supplies s on acco account unt from Suppl Supplier ier C, Php Php 8, 8,800.00 800.00..

 

PAGE 8 15 17 22 26 29 30 31 31 31

Juan Juanita ita Pined Pineda a inves invested ted in the bus business iness o own wn offic office e equipm equipment ent with a fa fair ir mark market et value of P Php hp 52,50 52,500.00. 0.00. Rece Received ived P Php hp 61, 80 800.00 0.00 fro from m cha charge rge cus custome tomers rs to app apply ly on the their ir own a accou ccounts. nts. Rece Received ived a b bill ill from Park T Truck rucking ing for repair repair s servic ervices es perf performe ormed, d, Php 8, 8,500.00 500.00.. Paid Suppl Supplies, ies, Inc, Php 8,800.00 8,800.00 in full paym payment ent o off ac account count.. Pai Paid d sa salar laries ies to empl employe oyees, es, Php 21, 21,000 000.00 .00 Rec Receiv eived ed Php Php 39, 39,300 300.00 .00 fo forr ser servic vices es perfo performe rmed. d. Rece Received ived a and nd pai paid d gasol gasoline ine an and d oil bi billll to the serv service ice vehicl vehicle, e, Php 12,500 12,500.00. .00. Bille Billed d South South Ch China ina Bank Bank fo forr se servic rvices es perform performed, ed, P Php hp 45, 45,000.00 000.00.. Dalis Dalisay ay withdre withdrew wc cash ash for perso personal nal u use, se, Php 14, 500.00 500.00..