ACCOUNTANCY AND BUSINESS MANAGEMENT 2

PART 2: BASIC ACCOUNTING JOURNALIZING

RECORDING BUSINESS TRANSACTIONS
Accounting Cycle

1. Identification of events to be recorded 6. Preparation of Financial Statements

2. Transactions are recorded in a Journal
3. Journal Entries are recorded to the Ledger
4. Preparation of a Trial Balance
5. Preparation of a Worksheet including Adjusting
Entries
7. Adjusting Entries are Journalized and Posted
8. Closing Journal Entries are Journalized and Posted
9. Preparation of a Post-Closing Trial Balance
10. Reversing Journal Entries are Journalized
(Optional)

The Journal
• Companies initially record transactions 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. Companies may use various kinds of journals, but every company has the most basic form
of journal, a general journal.

JOURNALIZING
• Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for
each transaction. A complete entry consists of (1) the date of the transaction, (2) the accounts and amounts to be
debited and credited, and (3) a brief explanation of the transaction.

CONTENTS OF THE GENERAL JOURNAL

• The date of the transaction is entered in the Date column.

• The debit account title (that is, the account to be debited) 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) 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 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 PR. (which stands for Posting Reference) 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 ENTRIES

1
• Some entries involve only two accounts, one debit and one credit. An entry like these is considered a simple
entry. Some transactions, however, require more than two accounts in journalizing. An entry that requires three
or more accounts is a compound entry.

TRANSACTIONS ARE JOURNALIZED (STEP 2)

Sample Transactions
January 2016
1 Galiciano Del Mundo invested P100,000 in his advertising agency.
1 Galiciano Del Mundo issued a promissory note for a P30,000 loan from Monte Bank. The note carries a
20% interest per annum. Both interest and the principal are payable in full one year.
2 Rented office space paying two month’s rent in advance, P8,000.
4 Acquired art equipment for P42,000 in cash.
5 Acquired office equipment from Fair & Square for P30,000; paying P15,000 in cash & the balance next
month
8 Purchased on credit art supplies for P18,000 and office supplies for P8,000 from Batangas Supply.
8 Paid P4,800 to Prudent Insurance Inc. for a one-year insurance policy with coverage effective Jan. 1
9 Paid Batangas Supply P10,000 of the amount owed.
10 Performed services for a car dealer and collected fees of P14,000.
12 Paid the secretary’s salary P6,000.
15 Accepted P10,000 as an advance fee for art work to be done for another agency.
19 Performed services by placing print advertisements for Laurel Arcade, and charged P28,000.
25 Del Mundo withdrew P14,000 for personal expenses.
26 Paid the secretary two more week’s salary, P,6000.
29 Paid the electricity bill of P1,000
30 Received GLOSMARTEL telephone bill, P900.
31 Collected P10,000 on account from Laurel Arcade for services already rendered.

PART 3-4: POSTING AND TRIAL BALANCE PREPARATION

JOURNAL ENTRIES ARE RECORDED TO THE LEDGER/POSTING (STEP 3)

The Ledger
• The entire group of accounts maintained by a company is the ledger. The ledger provides the balance in each of
the accounts as well as keeps track of changes in these balances.
• Companies may use various kinds of ledgers, but every company has a general ledger.
• A general ledger contains all the asset, liability, and owner’s equity accounts.
• POSTING - Transferring journal entries to the ledger accounts is called posting.

The Simple T-Account form used in accounting textbooks is often very useful for illustration purposes. However,
in practice, the account forms used in ledgers are much more structured. Below is a typical form, using assumed
data from a cash account.

2
This format is called the three-column form of account. It has three money Columns - debit, credit, and balance.
The balance in the account is determined after each transaction. Companies use the explanation space and
reference columns to provide special information about the transaction.

Chart of Accounts

Bob Sample opened the Campus Laundromat on September 1, 2015. During the first month of operations, the
following transactions occurred.
Sept.
1 Bob invested P200,000 cash in the business.

3
2 The company paid P10,000 cash for store rent for September.
3 Purchased washers and dryers for P250,000, paying P100,000 in cash and signing a P150,000, 6-month,
12% note payable.
4 Paid P12,000 for a one-year accident insurance policy.
10 Received a bill from the Daily News for advertising the opening of the laundromat P2000.
20 Bob withdrew P7000 cash for personal use.
30 The company determined that cash receipts for laundry services for the month were P62,000.

The chart of accounts for the company is the same as that for Pioneer Advertising Agency plus No. 610
Advertising Expense
Instructions
(a) Journalize the September transactions. (Use J1 for the journal page number.)

TRIAL BALANCE (STEP 4)

• A trial balance is a list of accounts and their balances at a given time.
• Customarily, companies prepare a trial balance at the end of an accounting period. They list accounts in the
order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right
column.

Importance of a Trial Balance

1. The trial balance proves the mathematical equality of debits and credits after posting.
2. A trial balance may also uncover errors in journalizing and posting.
3. A trial balance is useful in the preparation of financial statements.

________________________________________________________________

QUIZ #___

4
Bridgette Reyes is a licensed dentist. During the first month of the operation of her business, the following
events and transactions occurred for the month of APRIL, 2018.
1 Invested P200,000 cash in her business.
1 Hired a secretary-receptionist at a salary of P7000 per week payable monthly.
2 Paid office rent for the month P11,000.
3 Purchased dental supplies on account from Smile Company P40,000.
10 Performed dental services and billed insurance companies P51,000.
11 Received P10,000 cash advance from Heather Greene for an implant.
20 Received P21,000 cash for services performed from James Chang.
30 Paid secretary-receptionist for the month P28,000.
30 Paid P24,000 to Smile Company for accounts payable due.

Bridgette uses the following chart of accounts:

101 CASH 201 ACCOUNTS PAYABLE 400 SERVICE REVENUE
112 ACCOUNTS RECEIVABLE 209 UNEARNED SERVICE REVENUE 726 SALARIES & WAGES EXPENSE
126 SUPPLIES 301 OWNER’S CAPITAL 729 RENT EXPENSE.
________________________________________________________________

QUIZ #___

The following accounts come from the ledger of SnowGo Company at December 31, 2015. Prepare a trial
balance in good form.
157 Equipment P88,000 112 Accounts Receivable 4,000
306 Owner’s Drawings 8,000 301 Owner’s Capital 20,000
130 Prepaid Insurance 6,000 400 Service Revenue 95,000
201 Accounts Payable 12,000 101 Cash 7,000
212 Salaries and Wages Payable 12,000 726 Salaries and Wages Expense 42,000
732 Utilities Expense 3,000 200 Notes Payable 19,000
________________________________________________________________

ADJUSTING THE ACCOUNTS (STEP 5)

Fiscal and Calendar Years

• Accounting time periods are generally a month, a quarter, or a year.
• interim periods - Monthly and quarterly time periods.
• fiscal year - An accounting time period that is one year in length.
– A fiscal year usually begins with the first day of a month and ends 12 months later on the last day of a month.
• calendar year - (January 1 to December 31)

Accrual- versus Cash-Basis Accounting

• Accrual-basis accounting. Under the accrual basis, companies record transactions that change a company’s
financial statements in the periods in which the events occur. For example, using the accrual basis to determine
net income means companies recognize revenues when they perform services (rather than when they receive
cash). It also means recognizing expenses when incurred (rather than when paid).
• Cash-basis accounting, companies record revenue when they receive cash. They record an expense when they
pay out cash.
– Cash basis accounting is not in accordance with generally accepted accounting principles (GAAP)

Deferrals and Accruals

• Deferral - postponement of the recognition of:
– “an expense already paid but not yet consumed”
– “a revenue already collected but not yet earned or performed”

5
• Accruals – recognition of:
– “an expense incurred or consumed but unpaid”
– “a revenue earned or performed but uncollected”

Types of Adjusting Entries

Adjusting entries are classified as either deferrals or accruals.
Deferrals: Categories of adjusting entries
1. Prepaid expenses: Expenses paid in cash before they are used or consumed.
2. Unearned revenues: Cash received before services are performed.

Accruals:
1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

ADJUSTING FOR DEFERRALS

Prepaid Expense
• Kelz Advertizing Agency paid P8000 for 2 months rent in advance. By Jan. 31, half of the asset had expired, and
should be treated as an expense.
To record:
DR. CR.
Rent Expense 4,000
Prepaid rent 4000

Prepaid Insurance
• Kelz Advertising Agency acquired a one year insurance policy, paying P4,800 premiums. By the end of one
month part of the insurance expired.
Insurance Expense 400
Prepaid Insurance 400

Supplies Expense
• Kelz Advertising Agency purchased art supplies, P18,000 and office supplies, P8,000. At month’s end count
showed that art supplies costing P13,000 and office supplies costing P6,000 are still on hand.
Art Supplies Expense 5,000
Art Supplies 5,000

Office Supplies Expense 2,000

Office Supplies 2000

Depreciation of Property and Equipment

• Depreciation is the process of allocating the cost of an asset to expense over its useful life.
• Contra Account – (ex. accumulated depreciation) used to record reductions in a related account and its normal
balance is opposite of the related account.
• Book value is the difference between the cost of any depreciable asset & its related accumulated depreciation.

Depreciation of Property and Equipment

• The agency estimated that the art equipment, P42,000 and office equipment P30,000 will last 5 years (60
months) and be worthless by the end of that time. At month’s end record will show:
Depreciation Expense-Art Equipment 700
Accumulated Depreciation-Art Equipment 700
Depreciation Expense-Office Equipment 500
Accumulated Depreciation-Office Equipment 500

6
Unearned Revenues
• On Jan. 15 the Kelz Adv. Agency received P10,000 as an advanced payment for art work to be done for another
agency. At the end of the month, P4,000 of the art work was done and accepted by the other agency.
Unearned Service Revenue 4,000
Service Revenue 4,000

The ledger of Hammond Company, on March 31, 2014, includes these selected accounts before
adjusting entries are prepared.

DR. CR.
Prepaid Insurance P3,600
Supplies 2,800
Equipment 250,000
Accumulated Depreciation-Equipment P50,000
Unearned Service Revenue 92,000

An analysis of the accounts shows the following:

1. Insurance expires at the rate of P100 per month.

2. Supplies on hand total P800.
3. The equipment depreciates P20,000 a month.
4. During March, services were performed for one-half of the unearned service revenue.

A. Prepare the adjusting entries for the month of March.

________________________________________________________________

Instructions: 1. Journalize the adjusting entries. 2. Post the adjustments. 3. Prepare an Adjusted
Trial Balance for Pioneer Advertising Agency.

7
By the end of October an analysis of the accounts shows:
1. Pioneer Advertising paid for a one-year fire insurance policy that expires each month.
2. An inventory count at the close of business on October 31 reveals that P1,000 of supplies are still on hand.
3. Pioneer Advertising assumes that depreciation on the equipment is P480 a year.
4. From an evaluation of the service Pioneer performed for Knox during October, the company determines that it
should recognize P400 of revenue in October.

GENERAL JOURNAL: PIONEER ADVERTISING AGENCY

________________________________________________________________

GENERAL LEDGER: PIONEER ADVERTISING AGENCY

8
ADJUSTING FOR ACCRUALS

Accruals:
1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

Accrued Salaries
• Salaries were paid on the 12th and 26th day of the month. Each pay covered 10 days of the month. At month’s
end the secretary has worked for 3 more days. The employee has earned the salary for these days but it is not
paid until the regular payday. The salary for these 3 days is rightfully an expense for this month. The secretary’s
salary rate is P6,000 every two weeks or P600/day (P6000 for 10 working days).
To record the accrued expense we have:
Salaries Expense 1,800
Salaries Payable 1,800

Accrued Interest
• On Jan 1, Del Mundo borrowed P30,000 from Monte Bank. He issued a promissory note that carried a 20%
interest per annum. Both interest and principal will be payable in one year. At the end of January part of the
interest owed should be recorded.
To record interest for 1 month:
Interest Expense 500
Interest Payable 500
Interest = Principal x Interest rate x length of time
= P30,000 x 0.20 x 1/12
= P500

9
Accrued Revenues
In October, Pioneer Advertising performed services worth P12,000 that were not billed to clients on or before
October 31. Because these services are not billed, they are not recorded.
The accrual of unrecorded service revenue increases an asset account, Accounts Receivable.
It also increases owner’s equity by increasing a revenue account, Service Revenue.
To record:
Accounts receivable 12,000
Service revenue 12,000

________________________________________________________________

Micro Computer Services began operations on August 1, 2016. At the end of August 2016,
management prepares monthly financial statements. The following information relates to August.

1. At August 31, the company owed its employees P32,000 in salaries & wages that will be paid on
September 1.
2. On August 1, the company borrowed P300,000 from a local bank on a 15-year mortgage. The annual
interest rate is 10%.
3. Revenue for services performed but unrecorded for August totaled P44,000.
A. Prepare the adjusting entries needed at August 31, 2016.

Let’s get serious!

The Skyline Motel opened for business on May 1, 2014. Its trial balance before adjustment on May 31 is as
follows.

SKYLINE MOTEL
Trial Balance
May 31, 2014

Account Number DEBIT CREDIT

101 Cash ₽3,500
126 Supplies 2,080
130 Prepaid Insurance 2,400
140 Land 12,000
141 Buildings 60,000
149 Equipment 15,000
201 Accounts Payable ₽4,800
208 Unearned Rent Revenue 3,300
275 Mortgage Payable 40,000
301 Owner’s Capital 41,380
429 Rent Revenue 10,300
610 Advertising Expense 600
726 Salaries & Wages Expense 3,300
732 Utilities Expense 900
₽99,780 ₽99,780

10
In addition to those accounts listed on the trial balance, the chart of accounts for Skyline Motel also contains the
following accounts and account numbers:
No. 142 Accumulated Depreciation—Buildings No. 619 Depreciation Expense
No. 150 Accumulated Depreciation—Equipment No. 631 Supplies Expense
No. 212 Salaries and Wages Payable No. 230 Interest Payable
No. 718 Interest Expense No. 722 Insurance Expense
Other data:
1. Prepaid insurance is a 1-year policy starting May 1, 2014.
2. A count of supplies shows P750 of unused supplies on May 31.
3. Annual depreciation is P3,000 on the buildings and P1,500 on equipment.
4. The mortgage interest rate is 12% annually. (The mortgage was taken out on May 1).
5. Two-thirds of the unearned rent revenue has been earned.
6. Salaries of P750 are accrued and unpaid at May 31.
Journalize the adjusting entries on May 31.

A. Prepare a ledger using the three-column form of account. Enter the trial balance amounts and post the
adjusting entries. (Use J1 as the posting reference.)
B. Prepare an adjusted trial balance on May 31.

11