MODULE 4

Recording Business Transactions

Overview

This module discusses the steps in the Accounting Cycle, Steps in Analyzing Business
Transaction, and how to record transactions in a two column journal.

Module Objectives

At the end of this module, the student is expected to be able to:

1. List and Explain the sequential steps in the Accounting Cycle.

2. Identify the general journal as the book of original entry.
3. Outline the steps in analyzing business transactions
4. Journalize the transaction in its proper form.
5. Describe the general ledger and its uses.
6. Distinguished permanent and temporary accounts
7. Develop the chart of accounts
8. Post entries from the journal to the ledger
9. Prepare Trial balance
10. Perform steps in locating for errors

Course Materials

Accounting Cycle – refers to a series of sequential steps or procedures performed to

accomplish the accounting process.

Steps in the Accounting Cycle:

Transaction are recorded in the Journal – or

Journalization. The purpose is to record the dual effect of
Step 1 the transaction in the General Journal, the book of Original
Entry

During the Journal Entries are Posted to the Ledger – this is

Accounting popularly known as Posting. The porpuse is to transfer
Period 2 what was recorded in the General Journal into another book of
account, the General Ledger. The book of Final Entry

Preparation of Trial Balance – The purpose is to provide

listing of all accounts and to prove the equality of the Debits
3
and Credits in the General Ledger.
At the end
of the Preparation of Worksheet and Adjusting Entries –
Accounting 4 worksheet aids in the preparation of Financial Statements.
Period
5 Financial Statement Preparation – the purpose of which is to
provide useful information to the users of financial information.

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 Adjusting Journal Entries are journalized and Posted – to
Step 6
At the end record the accruals and defferals and estimates.
of the Closing Journal Entries are journalized and Posted – to
Accounting 7 close nominal or temporary accounts and transfer the net
period income to the capital account of the owner.
Preparation of Post Closing Trial Balance – to check the
8
equality of debits and credits after closing entries.
At the start of Reversing Entries are journalized and Posted – to simplify
thenext the recording of certain regular transaction in the next
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accounting accounting period.
Period

The cycle is repeated every Accounting Period. The first two steps are being done during the
accounting period while the 3rd to 8th steps are being done at the end of the accounting period and
the last step is at the beginning of the next accounting period

On this module we will be discussing the first two steps which is journalizing and posting.

Source Documents is a written evidence that a transaction exists. From the source documents
we can identify and describe the transaction that took place. This evidences contains the
information about the nature and the amounts of the transactions and become the basis of the
journal entry.

Common examples of source documents are:

1. Invoice

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Official Receipt

Bank Deposit Slip

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Check

Statement of Account

Purchase Order

After transactions have been identified from the source documents, then it has to be journalized.

Journalizing – Step 1

The Journal

The Journal is a chronological record of the business’ transaction. A journal entry shows all the
effect of a business transactions in terms of debits and credits. The journal is also called the
book of original entry. The volume of transactions of a particular business determine the type of
journal to be used. The simplest type of the journal is the General Journal.

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 Journal

Date Account Title & Explanation P.R. Debit Credit

The standard content of the general journal are as follows:

Date – here the date of the transaction is being recorded. The month and year are not rewritten
for every entry unless the year and month change, or it is in the next page. The year is written on
the first line of the date column, the month on the first column and the day on the second column,

Account Title and Explanation – The account to be debited is written on the extreme left of the
column, while the account to be credited is written slightly indented. The debit accounts must be
written first followed by the credit accounts. A simple explanation of the entry follows.

P.R. (Posting Reference) – This will be used when the entries are posted to the general ledger.
Discussion on the posting process will be made when we are on the topic posting.

Debit – here the amount of the debits are entered on this column.

Credit – here the amount of the credits are entered on this column.

Simple and Compound Entry

Simple Entry – when there are only two (2) accounts affected. One debit and one credit.
Compound Entry – when there are more than 2 accounts affected.

Steps in Analyzing Business Transactions:

1. Determine the items affected. Is it Asset, Liability or Owner’s Equity account.

2. How it is affected? Does it increase or decrease?
3. What particular account is affected? Example: Cash, Accounts Payable, etc.
4. How much is the increase or decrease?
5. Apply the Rules of Debit and Credit.

Note: in preparing journal entry, the total debit should always equal the total credit.

Rules of Debit and Credit:

Debit Side: Increase in Assets

Decrease in Liabilities
Decrease in Owner’s Equity due to:
Increase in Expenses
Decrease in Revenues

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 Withdrawal by the owner.

Credit Side: Decrease in Assets

Increase in Liabilities
Increase in Owner’s Equity due to:
Investment and additional investment of the owner
Increase in Revenues
Decrease in Expenses

Sample transactions and how to record it using a general journal.

Transaction 1
Nov. 2 The owner, of Rosas Landscape Specialist, Mina Rosas invested
P500,000 to start a business.

Analysis Asset Cash Increase, Owner’s Equity Rosas Capital increase by

P500,000

Rules of Dr & Cr Increase in Asset – Debit; Increase in Owner’s Equity - Credit

Entry:

Date Account Title & Explanation P.R. Debit Credit

2020
Nov. 2 Cash P500,000.00
Rosas, Capital P500,000.00
To record investment.

Transaction 2
Nov. 2 The business rented an office space and paid a 3 months advance rental
of P15,000.

Analysis Asset Prepaid Rent Increase, Asset Cash decrease by P15,000

Rules of Dr & Cr Increase in Asset – Debit; Decrease in Asset - Credit

Entry
Date Account Title & Explanation P.R. Debit Credit
Nov. 2 Prepaid Rent P15,000.00
Cash P15,000.00
To record prepaid expenses

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Transaction 3
Nov. 5 Bought equipment from DY Trading on account, 60,000.

Analysis Asset Equipment, Increase, Liability Accounts Payable Increase by

P60,000

Rules of Dr & Cr Increase in Asset – Debit; Increase in Liability - Credit

Entry:
Date Account Title & Explanation P.R. Debit Credit
Nov. 5 Equipment P60,000.00
Accounts Payable P60,000.00
To record equipment on
acct.

Transaction 4
Nov. 10 Rosas Landscape Specialists rendered services to various customers on
cash basis. P12,500

Analysis Asset Cash - Increase, OE Service Revenue - Increase by P12,500

Rules of Dr & Cr Increase in Asset – Debit; Increase in OE - Credit

Entry:
Date Account Title & Explanation P.R. Debit Credit
Nov. 10 Cash P12,500.00
Service Revenue P12,500.00
To record rendering of
services

Transaction 5
Nov. 12 Billed Ms. De Jesus for landscaping services done in her lawn, P50,000

Analysis Asset Accounts Receivable - Increase, OE Service Revenue - Increase

by P50,000

Rules of Dr & Cr Increase in Asset – Debit; Increase in OE - Credit

Entry:
Date Account Title & Explanation P.R. Debit Credit
Nov. 12 Accounts Receivable P50,000.00
Service Revenue P50,000.00
To record rendering of
services on account.

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Transaction 6
Nov. 15 Paid salaries of part-time workers, P5,000.

Analysis Asset Cash - Decrease, Salaries Expense - Increase by P5,000

Rules of Dr & Cr Decrease in Asset – Credit; Increase in Expenses - Debit

Entry:
Date Account Title & Explanation P.R. Debit Credit
Nov. 15 Salaries Expense P5,000.00
Cash P5,000.00
To record payment of
expense

Transaction 7
Nov. 20 Collected the account of Ms. De Jesus, P50,000

Analysis Asset Cash - Increase, Asset Accounts Receivable - Decrease by

P50,000

Rules of Dr & Cr Increase in Asset – Debit; Decrease in Asset - Credit

Entry:
Date Account Title & Explanation P.R. Debit Credit
Nov. 20 Cash P50,000.00
Accounts Receivable P50,000.00
To record collection of
account

Transaction 8
Nov. 25 Paid the account with Dy Trading in full

Analysis Asset Cash - Decrease, Liability Accounts Payable - Decrease by

P60,000

Rules of Dr & Cr Decrease in Asset – Credit; Decrease in Liability - Debit

Entry:
Date Account Title & Explanation P.R. Debit Credit
Nov. 25 Accounts Payable P60,000.00
Cash P60,000.00
To record payment of account

Transaction 9
Nov. 27 The owner Ms. Rosas withdraw P10,000 cash for her personal use

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 Analysis Asset Cash - Decrease, Rosas Withdrawals - Increase by P10,000

Rules of Dr & Cr Decrease in Asset – Credit; Decrease in OE - Debit

Entry:
Date Account Title & Explanation P.R. Debit Credit
Nov. 25 Rosas, Withdrawals P10,000.00
Cash P10,000.00
To record withdrawals by the
owner.

The Ledger

The General Ledger is the “reference book” of the accounting system, and is use to classify and
summarize transactions. The accounts in the ledger are classified into two groups namely:

1. Balance Sheet Accounts or the Permanent Accounts – Assets. Liabilities, and Owner’s
Equity.

2. Income Statement Accounts or the Temporary Accounts – Income and Expenses. We

call them temporary because at the end of the accounting period we have to close it to a
permanent owner’s equity account.

We maintain a separate ledger account for every accounts used. We sometimes refer to the
ledger as T accounts.

Chart of Accounts:

The Chart of account is the list of all the accounts that the bookkeeper or accountant use in
recording transactions. The chart is arrange in the financial statement order, that is Assets first,
followed by Liabilities, Capital, Drawing, Revenue and Expenses. The accounts must be
numbered in a flexible manner to allow indexing and cross referencing.

Rosas Landscape Specialist

Chart of Accounts

Balance Sheet Accounts Income Statement Accounts

110 Cash 410 Service Revenue
120 Accounts Receivable Expenses
130 Supplies 510 Salaries Expense
140 Prepaid Rent 520 Supplies Expense
150 Prepaid Insurance 530 Rent Expense
160 Vehicles 540 Insurance Expense
165 Accumulated Depreciation - Vehicles 560 Advertising Expense
170 Equipment 570 Depreciation Expense – Vehicles
175 Accumulated Decpreciation – Equipt. 580 Depreciation Expense - Equipment
Liabilities 590 Interest Expense

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 210 Notes Payable
220 Accounts Payabke
230 Salaries Payable
240 Interest Payable
250 Unearned Revenues
Owner’s Equity
310 Rosas, Capital
320 Rosas, Withdrawals
330 Income Summary

Posting – Step 2

Posting means transferring the amounts from the journal to the appropriate accounts in the
ledger. Debits in the journal are posted as debits in the ledger and credits in the journal are
posted as credit in the ledger.

Steps in Posting to the Ledger.

1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference column of the ledger.
3. Post the debit amount from the journal as a debit amount in the ledger and the credit
amount from the journal as a credit amount in the ledger.
4. Enter the account number in the posting reference column of the journal once the amount
has been posted to the ledger

Ledger Accounts After Posting

At the end of an accounting period, the debit or credit balance of each account must be
determined to enable us to come up with a trial balance.

 Each account balance is determined by footing (adding) all the debits and credits.
 If the sum of an account’s debit is greater than the sum of its credits, the account
has a debit balance.
 If the sum of the credit is greater than the sum of debits, the account has a credit
balance.

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 Illustration of Posting using the journal entries of Rosas Landscaping Specialists.
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Journal Page 1
Date Account Title & Explanation P.R. Debit Credit
1 2020
Nov. 2 Cash 110 P500,000.00
Rosas, Capital 310 P500,000.00
To record investment.

The Ledger 3 4
3
Account: Cash Account No. 110
Date Explanation J.R. Debit Credit Balance
2020
Nov. 1 J-1 P500,000.00 P500,000.00

Account: Rosas Capital Account No. 310

Date Explanation J.R. Debit Credit Balance
2020
Nov. 1 J-1 P50.000,000 P500,000.00

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