CHAPTER 3 Delivery Receipt Prepared by the enterprise and signed

THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY by the customer to evidence the
BOOKKEEPING SYSTEM acceptance/receipt of the goods
delivered to the customer
Business Transaction – exchange of values (expressed in terms of Official Receipt Issued to evidence the receipt of cash
money) involving two parties (in the case of external transactions) from customers, proprietor, or other
or within an enterprise (internal transactions). It is an economic parties
activity that causes an increase and/or decrease in the elements of Vendor’s invoice A sales invoice issued to the
a financial statement. enterprise by suppliers or vendors. A
bill for goods purchased or services
External Internal availed.
Includes sale of goods Includes the Purchase Requisition Evidences an employee’s request for
to customers or the manufacture of goods Forms the purchase of needed goods or
provision of services for sale and the supplies.
to clients incurrence of losses Must be approved by the
resulting from fire or management before an actual
flood (casualty losses) purchase is made.
IOUs Note acknowledging indebtedness to
Note: An event is accountable only if it has an effect of the elements the enterprise
of a financial statement. Promissory notes Unconditional promise writing made
by one person to another, signed by
Source Documents – the original record of a business transaction. the maker, engaging to pay on
It contains the following information: demand, or at a fixed or determinable
1. Date of the transaction future time, a sum certain in money to
2. Nature of the transaction order or bearer.
3. Amount involved Bank Statements A summary of all financial transactions
4. Names of the parties occurring over a certain period
(usually one month) on a bank
Source Document Purpose account. It shows the beginning
Sales Invoice balance of the account, the increases
 Cash Sales Issued to evidence a sale for cash and decreases, and ending balance of
Invoice the account.
 Charge Sales Issued to evidence a sale on account Minutes of the Meeting Written record of a meeting (such as
Invoice or credit meetings of shareholders or the board

© 2019 John Yuri Zapanta

 of directors of a corporation 2. Increase in Assets = Increase in Equity
Business letters Business correspondence with 3. Increase in one Asset = Decrease in another Asset
government agencies, customers, 4. Decrease in Assets = Decrease in Liabilities
suppliers, and other parties. 5. Decrease in Assets = Decrease in Equity
Job time tickets Forms containing information on the 6. Increase in Equity = Decrease in Liabilities
time spent working at a particular 7. Increase in one Liability = Decrease in another Liability
customer order (job). 8. Increase in one Equity = Decrease in another Equity
Certificates of stock Documents evidencing ownership of
shares in a corporation Expanded Accounting Equation:
Time records/timesheets A detailed record showing the time-in
or out of employees for a particular ASSETS = LIABILITIES + EQUITY + INCOME – EXPENSES
period of time
Check voucher Form used to facilitate the The Account
authorization of cash disbursement
transactions. A voucher contains: Account Title
1. Name of the payee; Debit Credit
2. Reason for the disbursement;
3. The amount involved
Debit – refers to the left side of an account
Journal voucher Document used for transactions and
journal entries for which there is no Credit – refers to the right side of an account
other source document.
Usually prepared in connection with Accounting Equation presented inside an account:
year-end adjustments to the
accounting records and for correcting Account Title
errors in the records Assets Liabilities and Equity

Basic Accounting Equations: Account Titles

ASSETS = LIABILITIES+ EQUITY
Assets
EQUITY = ASSETS - LIABILITIES
Cash Medium of exchange for
Possible effects of business transactions:
business transactions. It is
1. Increase in Assets = Increase in Liabilities accepted by a bank for

© 2019 John Yuri Zapanta


Held for trading securities
Loans and Receivables
Inventories
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deposit and immediate credit
at face value.
Temporary investments of
excess cash which are
primarily held for short term
gain.
Known as “investments at fair
value through profit or loss”.
Include trade receivables and
non-trade receivables.
Trade receivables – claims
against others which arise in
the ordinary course of
business
Non-trade receivables
represent all other claims
which are not trade.
 Non-trade accounts
receivable
 Non-trade notes
receivable
Assets which are:
a. Held for sale in the
ordinary course of
business;
b. In the process of
production for such
sale;
c. In the form of
materials or supplies
to be consumed in the
production process or
in the rendering of
services.
Prepaid Expense Expenses paid for in advance.
Subsequently, they become
expenses.
Long-term investments Investment as an asset held
for the accretion of wealth
through capital distribution,
such as interest, royalties,
dividends and rentals, for
capital appreciation or for
other benefits to the
investing enterprise such as
– those through trading
relationships.
Classifies as long-term when
they are intended to be held
for long period of time (i.e.
more than a year)
Property, Plant and These are tangible assets held
Equipment by an enterprise for use in the
production or supply of goods
and services, or for rental to
others, or for administrative
purposes and which are
expected to be used during
more than one accounting
period.
Intangible Assets These assets are identifiable,
non-monetary assets without
 physical substance. These
include patents, copyrights,
licenses, franchises, and
trademarks.
Liabilities
Accounts Payable The opposite of accounts
receivable
Notes Payable A note payable is like a note
receivable, except this time
the enterprise is the one who
promises to pay
Accrued Liabilities Amounts owed to others for
unpaid expenses. Similar to
Accounts Payable, except that
Accounts Payable are for
items which have already
been consummated, while
accrued expenses are for
items which are continuing in
nature
Ex: salaries payable, taxes
payable, and accruals for
utilities expense
Unearned Revenues Sometimes the enterprise
receives payments before
providing goods or services.
These are unearned
revenues. Once the
enterprise complies with its
obligation, the advance
collections become earned
© 2019 John Yuri Zapanta
and become part of the
income.
Mortgage Payable Account used for recording
long-term debts of an
enterprise for which the
company has pledged certain
assets as security for the debt
(collateral).
Bonds Payable An enterprise often obtains
the needed capital/funds by
issuing (floating) bonds.
Bond – a contract between
the issuer and the lender
specifying the terms of
repayment as well as the
interest to be paid.
Equity
Equity or Capital Used to record original and
additional investments of the
owner of the business entity.
Increased by net income
earned during the year
Withdrawals When the proprietor or
partner withdraws cash or
other assets for non-business
use, such withdrawals are
reflected in this account.
Income Summary It is a temporary account used
to summarize all income and
expenses for a given period. If
 total income is greater than
total expenses, “net income”
results. Otherwise, “net loss”
is sustained.
Income Accounts
Service Income or Fees Revenues earned by
Income performing services for
customers
Sales Revenues earned as a result
of sale of merchandise
Expense Accounts
Cost of Sales The cost incurred to purchase
or to produce the products
sold to customers during the
period. For a service business,
any expense which could be
directly attributed to the
provision of services called
“cost of services”
Salaries and Wage Expense Includes all payments as a
result of an employer-
employee relationship such as
salaries or wages, 13th month
pay, and other related
employee benefits.
Salaries – normally paid for
workers who use analytical
skills
Wage- paid to workers who
use manual labor
Utilities Expense Expenses related to use of
© 2019 John Yuri Zapanta
communication facilities, the
consumption of electricity
and water.
Rent Expense Expense for leased office
space, equipment or other
assets renter from others.
Supplies Expense The account used for
recording the usage of
supplies in the normal course
of business
Insurance Expense Portion of premiums paid on
insurance coverage which has
expired
Depreciation Expense The portion of the cost of a
tangible asset allocated or
charges as expense during the
accounting period
Bad Debts Expense The amount of receivables
estimated to be uncollectible
and charged as expense
during an accounting period.
Sometimes called
“Uncollectible Accounts
Expense” or “Impairment Loss
on Receivables”
Interest Expense Expense related to the use of
borrowed funds
Also known as “finance cost”
Summary Rules of Debit and Credit
Debit a/an Credit a/an
Asset To increase Asset To decrease
Liability To decrease Liability To increase
Capital To decrease Capital To increase
Income To decrease Income To increase
Expense To increase Expense To decrease

Account Balances
a. The difference between the total debits and total
credits of each account.
b. If the total debits are greater than the total credits:
debit balance
c. If the total credits are greater than total debits: credit
balance
d. If the total debits are equal to the total credits: zero
balance

Normal Balance – the usual balance of an account assuming

proper accounting has been made.
 Assets and expenses have normal debit balance
 Liabilities, equities, and income have normal credit
balance

© 2019 John Yuri Zapanta

 CHAPTER 4
ACCOUNTING CYCLE – SERVICE BUSINESS
The Accounting Cycle:
1. Analyzing business transactions through source
documents.
2. Journalizing or the recording of transactions in a
journal.
3. Posting or transferring of entries from the journal to
the ledger.
4. Preparing the trial balance.
5. Preparing a 10-column worksheet and making the
necessary adjusting journal entries.
6. Preparing the financial statements based on adjusted
account balances.
7. Recording adjusting entries to the journal and posting
the same to the ledger.
8. Recording and posting of closing entries.
9. Ruling and balancing real and nominal accounts.
10. Preparing a post-closing trial balance.
11. Preparing reversing entries.
Books of Account
Journal – the book where transactions are initially recorded in
a systematic and chronological order (aka “books of original
entry)
e. For each transaction, a journal shows the debit and
credit effects of transactions on specific accounts.
f. Most basic form is the general journal
g. Part of either a Manual Accounting System or a
Computerized Accounting System (CAS)
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Procedure for recording journal entries:
1. Analyze the business transaction
a. Should reflect a transaction’s economic substance
rather than its legal form
b. Proper analysis can only be done by reviewing the
source documents
2. Write the date of the entry in the Date column
a. Write the year in small figures at the top of the
column.
b. Month is written below the year, on the first line
c. Write the day of the month on the first line in the
second column immediately after the month
Note: The date is written only once for each entry. The
month need not be repeated for other entries within
the same month
3. Record the debit part of the entry
a. Write the account title at the extreme left edge of
the Account Title Column.
b. Write the amount of the account in the Debit
Column
4. Record the credit part of the entry
a. Indent each account title about one-half inch from
the left edge of the Account Title Column.
b. Write the amount of the credit item in the Credit
Column
5. Provide a brief description of the transaction to explain
the journal entry made
 a. Indent each line of the description about one-half
inch from the left edge of the Account Title
Example:
Date Account Title/ Particulars PR
2015
1 May 1 Cash
2 Tigre, Capital
3 Original Investment
4 4
Simple journal entry – If there is only one account debited
and one account credited
Compound journal entry – Where more than one account is
involved in a single entry
Memorandum entry – An entry which has no debit or credit
and which shows only the date and a brief explanation or
reminder.
Note: If an error is made in writing any part of the entry, the
entry is corrected by drawing a line through the incorrect part
and writing the correction immediately above it.
Chart of Accounts – a list of all the accounts of the business
and their respective account numbers. The accounts are
arranged in the following order: Assets, Liabilities, Equity,
Income, and Expenses.
© 2019 John Yuri Zapanta
DR CR
5 0 0 0 0 0 - 1
5 0 0 0 0 0 - 2
3
Ledger – A group of accounts (aka “final entry”). The effects of
business transactions are summarized in individual accounts
and each account has an individual record in the ledger.
General Ledger – contains the entire set of accounts used by a
business.
Procedure for Posting Journal Entries:
Posting – the process of transferring the entries from the
journal to the accounts in a ledger.
- Normally done at the end of the month, when all
journal entries for the month have been recorded.
1. Using the account number (as provided in the chart of
accounts), locate the account title in the ledger.
2. Write the date of the journal entry
 3. Write in the reference column (journal reference or JR)
of the ledger the page of the journal where the journal
entry came from
4. Transfer the debit amount from the journal entry to
the Debit Column per ledger, and the credit amount
per journal entry to the Credit Column per ledger
5. Enter the account number in the Reference Column
(posting reference or PR) the account number once the
figure has been posted to the ledger
Note: After all transactions for the period have been posted to
the ledger accounts, the balance for each account is
determined.
Trial Balance – a list of all accounts and their balances. It
indicates whether total debits equal total credits.
- Debit balance
- Credit balance
- Zero Balance
Footing the Accounts – the process of adding all the debit and
credits after all the entries are posted from the journal to the
ledger.
- The totals for the debit column and the credit column
are entered in small pencil figures after the last entry.
- The debit total and the credit total are compared and
the difference is obtained (balance)
- The balance is written in pencil on the greater side
under the “Items” Column, in line with the last entry
item.
© 2019 John Yuri Zapanta
Preparing the Trial Balance:
1. On a separate sheet of paper, indicate the heading.
The heading is composed of:
a. The name of the company
b. The title of the Report
c. Date
2. Review the general ledger and note all open accounts
3. Immediately below the heading, transfer the account
numbers, account titles, and account balances of all
accounts with open balances. List down the accounts
in the following order: Assets, Liabilities, Equity,
Income, and Expenses
4. Determine the total debits and the total credits. Both
totals should be equal.
When the Trial Balance is NOT BALANCED:
- Signifies an error committed along the process, which
may be any of the following:
1. Error in footing the debit and credit columns;
2. Error in transferring from the ledger to the trial
balance;
3. Errors in posting
4. Error in journalizing
5. Error of omission
Working-Back Method
1. Recheck the footing of the debit columns and the
credit columns of the trial balance
2. If the error is still unlocated, check if the difference
between the debit and credit is divisible by 9. If it is
 divisible by 9, this suggests either a transplacement
error or a transposition error.
3. Where the error is still unlocated, perform the
following:
a. Compare the amounts and accounts in the trial
balance with those in the ledger and correct
any discrepancies or omissions
b. Recheck the footing of the accounts in the
general ledger
c. Trace the postings from the journal to the
ledger. Be alert for possible omissions
d. Recheck the entries made in the journal and
ensure that total debit amounts are equal to
total credit amounts.

© 2019 John Yuri Zapanta