BM2003
REVIEW OF THE ACCOUNTING PROCESS
JOURNALIZING
Journalizing is the process of keeping a record of all business transactions in chronological order. It is also
where all financial transactions are first accounted for and recorded in an accounting document called a
journal. Hence, journal is also known as the book of original entry.
A typical journal includes the date, the account, and a brief description of the transaction that occurred.
Types of Journal
For convenience, transactions of similar nature are recorded and maintained in a specific journal. Under
the double-entry system, here are the seven (7) different types of a journal in accounting (iEduNote.com,
2017):
1. Purchase journal – It is used to record the credit purchases of the company.
•
Single-column purchase journal - It is used only for recording the credit purchase of
merchandise.
Purchase Journal
Accounts
credited
Date
•
Purchases/Inventory Dr.
Terms Reference
Accounts payable Cr.
Multi-column purchase journal - It is used in recording the credit purchase of merchandise,
supplies, and any other accounts according to the needs of the business.
Purchase Journal
Date
Accounts
credited
Purchases/
Accounts inventory
Terms Reference payable Cr.
Dr.
Supplies
Dr.
Other accounts
Dr.
2. Sales journal - It is used to record the credits sale of merchandise only. The cash sale of
merchandise is recorded in the cash receipt journal.
Source: https://www.accountingformanagement.org/wp-content/uploads/2018/01/sales-journal-img5.png
3. Cash receipts journal - It is used to record the cash inflows of the company. These inflows are
mainly from cash sales and cash from receivables. The format of this journal differs based on the
inventory system the company uses (perpetual or periodic).
•
Under the periodic inventory system
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Cash Receipt Journal
Date
•
Accounts
credited
Ref.
Cash
Dr.
Sales
discount
Dr.
Accounts
receivable
Cr.
Sales
Cr.
Other
accounts
Cr.
Under the perpetual inventory system
Cash Receipt Journal
Accounts
credited
Date
Ref.
Cash
Dr.
Sales
discount
Dr.
Accounts
receivable
Cr.
Sales
Cr.
Cost of goods
Other sold Dr.
accounts Merchandise
Cr.
Inventory Cr.
4. Cash payment journal - It is used to record all the disbursement transactions of the business. The
payment of cheque is considered cash payment. Hence, it is recorded in this journal.
Accounts
debited
Date
Ref.
Cash Payment Journal
Other
Accounts
accounts
payable
Dr.
Dr.
Purchase
Purchases discount
Dr.
Cr.
Cash
Cr.
5. General journal – It is used to record transactions that cannot be directly recorded in the previous
journal. Examples are the purchase of an asset on credit, stock of goods at year-end, the
rectification of errors, and adjusting entries.
Source: https://www.playaccounting.com/wp-content/uploads/2016/03/General-Journal.jpg
POSTING
Posting is the process of transferring journal entries to a ledger. The ledger provides balances of each
account and 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, as shown in the following
figure (Weygandt, Kimmel, & Kieso, 2018):
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Figure 1. Contents of General Ledger
Source: Accounting Principles (14th ed.), 2018, p.77
Steps in the Posting Process (Weygandt, Kimmel, & Kieso, 2018)
1. In the ledger, in the appropriate columns of the account(s) debited, enter the date, journal page,
and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which the debit amount was
posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the date, journal page,
and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which the credit amount was
posted.
These steps are illustrated below:
Figure 2. Posting a Journal Entry
Source: Accounting Principles (14th ed.), 2018, p.79
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Chart of Accounts (Weygandt, Kimmel, & Kieso, 2018)
Most companies have a chart of accounts that lists the accounts and the account numbers that identify
their location in the ledger. The numbering system starts typically with the balance sheet accounts and
follows with the income statement accounts.
Here is an example of a chart of accounts:
Figure 3. Chart of Accounts
Source: Accounting Principles (14th ed.), 2018, p.80
Recording Process Illustrated (Weygandt, Kimmel, & Kieso, 2018)
Figure 4. Recording of Investment by the Owner
Source: Accounting Principles (14th ed.), 2018, p.81
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In Figure 4, a basic analysis, an equation analysis, and a debit-credit analysis precede the journal entry and
posting of each transaction. For simplicity, the T-account form is used to show the posting.
TRIAL BALANCE
A trial balance is a list of accounts and their balances at a given time. Companies usually prepare a trial
balance at the end of an accounting period. This 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. The totals of the
two (2) columns must equal.
The trial balance proves the mathematical equality of debits and credits after posting. Under the doubleentry system, this equality occurs when the sum of the debit account balances equals the sum of the credit
account balances. A trial balance may also uncover errors in journalizing and posting (Weygandt, Kimmel,
& Kieso, 2018).
Steps in Preparing a Trial Balance
1. List the account titles and their balances in the appropriate debit or credit column.
2. Total the debit and credit columns.
3. Verify the equality of the two (2) columns.
Figure 5. Example of a Trial Balance
Source: Accounting Principles (14th ed.), 2018, p.88
ADJUSTING ENTRIES
Adjusting entries are classified as either deferrals or accruals. Deferrals are the amounts paid or received
in advance but not yet incurred or earned at the end of the reporting period. On the other hand, accruals
include revenues earned or expenses incurred but not yet received or paid. Each of these classes has two
(2) subcategories (Weygandt, Kimmel, & Kieso, 2018):
Deferrals
• Prepaid expenses - These are expenses paid in cash before they are used or consumed.
Illustrative Example 1: ABC Company
ABC Company purchased supplies costing P5,000 on September 5, 2X20. ABC recorded the
purchase by debiting the Supplies account. On September 31, an inventory count reveals that
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P3,500 is still on hand. The following entry should be made in the books of ABC company on
September 31:
Supplies expense
Supplies
1,500
1,500
In recording prepaid expenses, an accountant can use either the asset method or expense method.
•
i.
Under the asset method, a prepaid expense account or an asset account such as supplies
and prepaid rent is debited when the amount is paid. This balance is adjusted for the used
portion of the account at the end of the reporting period.
ii.
Under the expense method, the accountant initially records the whole amount as an
expense. This balance is then adjusted for the unused portion at the end of the reporting
period.
Unearned revenues - These are cash received before services are performed.
Illustrative Example 2: DEF Company
DEF Company received P12,000 on December 1, 2X20, from one of its tenants. The amount
received covers 3-month advance rental payments. DEF credited the payment as Unearned Rent.
On December 31, DEF should make the following entry on its books to record the amount earned
for the period:
Unearned rent
Rent revenue
4,000
4,000
In recording unearned revenues, an accountant can use either the liability method or revenue
method.
i.
Under the liability method, a liability account is credited when the amount is received. This
balance is adjusted for the earned portion at the end of the reporting period.
ii.
Under the revenue method, a revenue account is credited when the amount is received.
This balance is adjusted for the unearned portion at the end of the reporting period.
Accruals
• Accrued revenue - These are revenues for services performed but not yet received.
Illustrative Example 3: GHI Company
GHI Company performed services worth P50,000 on December 31, 2X20, which were not billed to
clients. GHI should make the following adjusting entry since under the accrual basis of accounting,
revenue should be recognized when earned regardless of when it is paid:
Accounts receivable
Service revenue
•
1,500
1,500
Accrued expenses - These are expenses incurred but not yet paid or recorded. Common examples
are interest, taxes, and salaries.
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Illustrative Example 4: JKL Company
JKL Company signed a 3-month note payable in the amount of P5,000 on October 1, 2X20. The
note requires JKL to pay interest at an annual rate of 12%. JKL records the accrued interest as of
October 31, 2X20, using the following entry:
Interest expense *
Interest payable
50
1,500
*P50 (P5,000 X 12% X 1/12)
FINANCIAL STATEMENTS
Adjusted trial balance is prepared after considering the effects of adjusting entries from the accounts in
the trial balance. Using the adjusted trial balance, the company can now prepare a financial statement.
As Figure 6 shows, Pioneer Advertising prepared the income statement from the revenue and expense
accounts. The company then used the owner’s capital, drawings account, and the net income to prepare
the owners’ equity statement.
Figure 6. Financial Statements from Adjusted Trial Balance
Source: Accounting Principles (14th ed.), 2018, p.137
Closing entry is a journal entry made at the end of the reporting period to bring the balances of temporary
accounts such as revenue, expenses, and drawing to zero. In effect, the company transfers the balances
to permanent accounts in the statement of financial position.
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Financial statements are reports that summarize all the activities and financial performance of the
company for a particular reporting period.
Five (5) Basic Financial Statements
• Statement of Financial Position
• Statement of Comprehensive Income/ Income Statement
• Statement of Cash Flows
• Statement of Changes in Owner’s Equity
• Notes to the Financial Statements
REFERENCES
iEduNote.com. (2017). 7 different types of journal book. https://iedunote.com/types-of-accountingjournal
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting principles (13th ed.). John Wiley & Sons.
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