ACCOUNTING BOOKS – JOURNAL AND LEDGER
ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY
This means that the whole assets of the Company come from the liability, or debt of the company, and from the capital of the owner of
the business, and the income it generated from the business operations. This reflects the double-entry bookkeeping and shown in the
balance sheet.
Illustrative Example:
Isko Delivery Service is owned and operated by Francisco Calvo. The following selected transactions were completed by Isko Delivery
Service during February:
A.
B.
C.
D.
Received cash from owner as additional investment, P35,000.
Paid creditors on account, P1,800.
Billed customers for delivery services on account, P11,250.
Received cash from customers on account, P6,740.
REAL ACCOUNTS
An account that retains and rolls forward its ending balance at the end of the year. These amounts then become the beginning balance
in the next period.
Examples:
Cash
Accounts Receivable
Accounts Payable
Notes Payable
Ordinary Share Capital
NOMINAL ACCOUNTS
An account that are used to track of financial transactions over a set period of time, usually a year. The begin with a zero balance and
are closed at the end of each accounting year. There are two major categories of nominal accounts: Expense and Revenue accounts.
Expense Accounts
A resource, when not yet used up for the current period, is considered an Asset and will provide benefits at a future time.
On the other hand, a resource that has been used for the current period is called an Expense. At the end of each accounting period,
expenses are closed out to the Retained Earnings Account which decreases the Owners’ Equity. Since expenses decrease the owners’
equity, those expense accounts carry a normal debit balance.
Revenue Accounts
Revenue Accounts reflect the accumulation of potential additions to retained earnings during the current accounting period.
At the end of the accounting period accumulation of revenues during the period are closed to the Retained Earnings Account which
increases Owners’ Equity. Revenue accounts carry a normal credit balance meaning the same balance as the Retained Earnings
Account.
THE ACCOUNTING CYCLE
Because accounting is all about getting data and putting them into the accounting equation, the end products are financial statements
such as a balance sheet and income statements, the process of accounting follows a cycle called the Accounting Cycle Process:
Step 1: Analyze Business Transactions.
A transaction is analyzed to find out if it affects the company and if it needs to be recorded.
Personal transactions of the owners and managers that do not affect the company should not be recorded.
A decision may have to be made to identify if a transaction needs to be recorded in special journals such as a sales or
purchases journal. (Business Transaction)
Therefore, what you should do is:

Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue,
an expense, or a drawing account is affected.

For each account affected by the transaction, determine whether the account increases or decreases.

Determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and
credit.
Illustrative Example:
N. Juna resigned from Company X. This does not affect any asset, liability, or the owner’s equity account.
B. Cano purchased P500 cash worth of supplies at Ace Hardware. This affects cash and supplies, both asset
accounts.


Step 2: Record This in the Journal.
Using the rules of debit and credit, transactions are initially entered in a record called a Journal and the entry made is called a
Journal Entry.
The journal serves as a record of when transactions occurred and were recorded.
The Source Document is the file or document (i.e. official receipt, purchase order, contract) that will provide a basis or reason for
a journal entry.
For example, an official receipt issued by the business will tell you that a sale transaction occurred and will be reflected by the
journal entry.
Illustrative Example:


M. Jaya resigned from Company X. No journal entry.
C. Danto purchased PHP500 cash worth of supplies to Ace Hardware. Debit Supplies PHP500, Credit Cash PHP500
Step 3: Post the Transactions on a Ledger.
A transaction is first recorded in a journal. Periodically, the journal entries are transferred to the accounts in the ledger.
The process of transferring the debits and credits from the journal entries to the accounts is called Posting.
Ledgers provide chronological details as to how transactions affect individual accounts. There are two types of ledgers: The
General Ledger and Subsidiary Ledger. The general ledger is a summary of the different Subsidiary Ledgers and can serve
as a control account.
Step 4: Prepare an Unadjusted Trial Balance.
Errors may occur in posting debits and credits from the journal to the ledger. One way to detect such errors is by preparing a trial
balance.
Double-entry accounting requires that debits must always equal credits. The trial balance verifies this equality.
The steps in preparing a trial balance are as follows:
1.
2.
3.
4.
List the name of the company, the title of the trial balance, and the date the trial balance is prepared.
List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance.
Total the Debit and Credit columns of the trial balance.
Verify that the total of the Debit column equals the total of the Credit column.
Step 5: Make adjustments. Journalize adjusting entries.
At the end of the accounting period, many of the account balances in the ledger can be reported in the financial statements without
change.
For example, the balances of the cash and land accounts are normally the amount reported on the balance sheet. However, some
accounts in the ledger require updating.
This updating is required for the following reasons:

Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts.
Also, managers usually do not need to know the amount of supplies on hand on a day-to-day basis.

Some revenues and expenses are earned as time passes rather than as separate transactions. For example, rent received in
advance (unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and
becomes an expense with the passage of time.

Some revenues and expenses may be unrecorded. For example, a company may have provided services to customers that are
has not billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next
accounting period even though the employees have earned their wages in the current period.
The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the Adjusting
Process.
The journal entries that bring the accounts up to date at the end of the accounting period are called Adjusting Entries.
The following are normally adjusted at the end of a period:

Accruals. These include unpaid salaries for the accounting period, unpaid interest expense, or unpaid utility expenses.

Prepayments. If a company has prepaid expenses such as prepaid rent or prepaid insurance, then the correct balances for
these accounts have to be established at the end of each accounting period to reflect their correct balances.

Depreciation and amortization expenses. Depreciation expenses are recognized at the end of each accounting period through
adjusting entries. If there are intangible assets such as franchise, the allocation of their costs which is called amortization
expense, is also recognized at the end of each accounting period through adjusting entries.

Allowance for uncollectible accounts. Bad debt expense from accounts receivable is also recognized through adjusting
entries.
Step 6: Prepare an Adjusted Trial Balance.
An adjusted trial balance is prepared after taking into consideration the effects of the adjusting entries. Again, this is to ensure that the
total debit balances equal the credit balances after posting and journalizing adjusting entries made.
Step 7: Make the closing entries.
In the discussion about accounts, it was discussed that nominal accounts (revenue and expense accounts) are closed to retained
earnings, or an owner’s capital account because these accounts refer only to a specific accounting period. Actually, these accounts
to be closed are accounts that can be seen in the income statement.
Upon closing:
 If the revenues exceed expenses during an accounting period, retained earnings will increase.
 The reverse is true which means that if the expenses exceed revenues, the retained earnings will decrease.
In closing temporary accounts:
 Revenue account balances are transferred to an account called Income Summary Account (sometimes profit or loss
summary).
 Expense account balances are also transferred to the Income Summary Account.
 The balance of the Income Summary (net income or net loss) is transferred to the owner’s capital account.
 The balance of the owner’s drawing account is transferred to the owner’s capital account.
Exercise 1 (Step 1, 2, and 3)
Terrence Romeo has been a practicing cardiologist for three years. During March 2009, Romeo completed the following transactions in
his practice of cardiology:
Mar 1
Provide medical services to clients for cash P35,000.
Mar 2
Paid rent for the month, P3,000.
Paid advertising expense, P1,800.
Mar 6
Purchased office equipment on account, P12,300.
Mar 15
Paid creditor on account, P1,200.
Mar 27
Paid cash for repairs to office equipment, P500.
Mar 30
Paid telephone bill for the month, P180.
Mar 31
Paid electricity bill for the month, P315.
ADJUSTMENTS:
1 Terrence Romeo, Mar 1 erroneously recorded 53,000 as 35,000
2 Rent for the month should be 6,000
3 Advertising expenses should be P180 only
Instructions: (A) Journalized the above transactions and (B) complete the table.
Part A
Date
Mar 1
Account Names
Debit
Credit
Cash
Service Income
Mar 2
Rent Expense
Advertising
Expense
Cash
Mar 6
Office Equipment
Mar 15
Accounts Payable
Mar 27
Repairs Expense
Mar 30
Utilities Expenses
Mar 31
Utilities Expenses
Accounts Payable
Cash
Cash
Cash
Cash
Part B
Mar
1
2
2
6
15
27
30
31
Cash
ASSETS
Accounts
Receivable
Office
Equipment
=
LIABILITIES
Accounts
Payable
+
OWNER’S EQUITY
Service
Expenses
Revenue
Exercise 2 (Step 4, 5 and 6)
Complete the adjusted trial balance of the worksheet of Tony Stark Company
Account Title
Cash
Accounts Receivable
Furniture
Equipment
Accounts Payable
Stark, Capital
Stark, Drawing
Service Income
Supplies Expense
Rent Expense
Utilities Expense
Communication Expense
Taxes Expense
Salaries Expense
Miscellaneous Expense
TOTAL
Depreciation - Furniture
Accum Dep’n - Furniture
Depreciation - Equipment
Accum Dep’n - Equipment
Prepaid Rent
Unused Supplies
Taxes Payable
Utilities Payable
Prepaid Taxes
Salaries Payable
Unearned S. Income
Unadjusted Balance
Dr.
Cr.
75,330
35,700
120,000
85,750
12,500
240,000
80,000
320,750
55,225
45,000
21,567
8,000
13,550
22,000
11,128
P 573,250
P 573,250
Adjustments
Dr.
j)
12,800
i)
k)
5,000
3,200
f)
1,750
e)
h)
2,268
2,050
a)
3,000
b)
4,275
c)
d)
9,000
15,200
g)
Adjusted Balance
Dr.
Cr.
Cr.
k)
3,200
j)
d)
c)
12,800
15,200
9,000
g)
2,500
a)
3,000
b)
4,275
e)
f)
2,268
1,750
h)
i)
2,050
5,000
2,500
TOTAL
Prepare explanations for each of the adjustments (a) to (k) that are incorporated in the worksheet
A. _______________________________________________________________________________________________
B. _______________________________________________________________________________________________
C.
_______________________________________________________________________________________________
D.
_______________________________________________________________________________________________
E. _______________________________________________________________________________________________
F. _______________________________________________________________________________________________
G.
_______________________________________________________________________________________________
H.
_______________________________________________________________________________________________
I.
________________________________________________________________________________________________
J. _______________________________________________________________________________________________
K. _______________________________________________________________________________________________
Exercise 3
Using the given form and additional information, complete the adjustments column of the partial worksheet of Jake Peralta’s Nursing
School.
Additional information:
a.
b.
c.
d.
e.
f.
g.
Out of the balance of the supplies, 70% is to be treated as an expense for the period.
Computers are estimated to have a useful life of 4 years, with no salvage value.
Accrued expenses for the period: Wages – P12,000; Taxes – P5,600; Utilities – P3,250
Prepaid expenses at the end of the period: Rent – P5,000;
Income collected but not yet earned, P24,500
Income earned but not yet collected, P7,500
5% of the unadjusted balance of tuition fees receivable is doubtful of collection
Account Title
Cash
Tuition Fee receivable
Supplies
Computers
Accumulated depreciation
- Computers
Accounts Payable
Peralta, Capital
Peralta, Drawing
Service Income
Utilities Expense
Rent Expense
Taxes and Licenses
Miscellaneous Expenses
TOTAL
Unadjusted Balance
Dr.
Cr.
172,500.00
122,550.00
65,200.00
210,000.00
105,000.00
Adjustments
Dr.
Adjusted Balance
Dr.
Cr.
Cr.
55,660.00
177,000.00
120,000.00
735,750.00
65,000.00
248,510.00
54,650.00
15,000.00
1,073,410.00
1,073,410.00
A
B
C
D
E
F
G
PROBLEM 2
Selected amounts from ParaSaMilktea Company's trial balance of 12/31/10 appear below:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Accounts Payable
Accounts Receivable
Accumulated Depreciation—Equipment Contra Asset
Allowance for Doubtful Accounts – Contra Asset
Bonds Payable
Cash
Common Stock
Equipment
Insurance Expense
Interest Expense
Merchandise Inventory
Notes Payable (due 6/1/11)
Prepaid Rent
Retained Earnings
Salaries and Wages Expense
P
160,000
150,000
200,000
20,000
500,000
150,000
60,000
840,000
30,000
10,000
300,000
200,000
150,000
818,000
328,000
(All of the above accounts have their standard or normal debit or credit balance.)
Part A.
a.
b.
c.
d.
e.
Prepare adjusting journal entries at year end, December 31, 2010, based on the following supplemental
information.
The equipment has a useful life of 15 years with no salvage value. (Straight-line method)
Interest accrued on the bonds payable is P 15,000 as of 12/31/10.
Expired insurance at 12/31/10 is P 20,000.
The rent payment of P 150,000 covered the six months from November 30, 2010 through May 31, 2011.
Salaries and wages earned but unpaid at 12/31/10, P 22,000.
Part B.
a.
b.
c.
d.
e.
f.
Indicate the proper balance sheet classification of each of the 15 numbered accounts in the 12/31/10
trial balance and put the total amount of the following:
Current assets
Property, plant, and equipment
Total Assets
Current liabilities
Long-term liabilities
Stockholders' equity