Difference between Accounting and Book

What is accounting? keeping

Is the ART (design and logo) and Science
(follow theories and principles specifically Book keeping – is the procedural or
the Generally Accepted Accounting mechanical aspect of accounting. It involves
Principles – GAAP) the set-up, update and maintenance of
of accounting records.
Documenting - source documents to
capture business transactions and the basis Accounting – is conceptual and goes
of beyond bookkeeping. Accounting includes
Recording - the journalizing - double entry the interpretation of information recorded
record keeping; thus, we have debit entries under book keeping. Book keeping may be
and credit entries in the Journal Book. This done even by properly trained non-
journal book is called the record of original accountants, while the practice of
entry. accountancy can only be done by certified
Ledgering - the posting - also a way to public accountants.
summary the transactions by type of
accounts – the various name involved in Please take note in particular that –
transactions. Examples of accounts: cash, 1. All transactions commence with the
Accounts receivables, furniture and fixtures proper authority by the authorizing
(examples of asset accounts or account officer before the transaction takes
titles) salaries, wages, rent (examples of place. Example: All payments.
expense account titles) through the Ledger 2. Business documents are prepared
(or Ledger Book); simultaneous with the
Summarizing - preparation of financial consummation of the transaction.
statements: This is for the proper
Income Statement (I/S) and Balance Sheet documentation of the transaction .
(B/S) 3. Documented transactions are then
transactions and event of Financial recorded in the journal and posted
Character (monetary in nature) and in the ledgers.
Interpreting the results thereof.
Source Document who request and
receive cash advances
Source Usual Purpose(s) from the enterprise.
Department Promissory notes An unconditional
promise in writing made
by one person (called
Sales Invoice A cash sales invoice is
the maker) to another,
issued to evidence a
signed by the maker,
sale for cash; a charge
engaging to pay on
sales invoice or credit
demand, or at a fixed or
sales invoice is issued to
determinable future
evidence a sale where
time, a sum certain in
goods are sold on
money to order or to
account or on credit.
bearer.
Delivery Receipt A document prepared
Bank statements A summary of all
by the enterprise and
financial transactions
signed by the customer
occurring over a certain
to evidence the
period (usually one
acceptance/receipt of
month) on a bank
the goods delivered to
account. It shows the
the customer.
beginning balance of
Official Receipt Issues by the business
the account, any
to evidence the receipt
increases or decreases
of cash from customers,
(with brief explanations)
the proprietor, and
and the ending balance
other parties.
of the account.
Vendor’s Invoice This is actually a sales
Minutes of Written record of a
invoice, except that it is
meetings meeting (such as
issued to the enterprise
meeting of shareholders
by the enterprise’s
or the board of directors
suppliers or vendors. A
of a corporation)
bill for goods purchased
or services availed.
Purchase Source document which Business letters – Business correspondence
requisition forms evidences an with government agencies, customers,
employee’s request for suppliers, or other parties.
the purchase of needed
goods or supplies.
Job time tickets - Forms containing
Purchase requests must
be approved by information on time spent working at a
company management particular customer order (job).
before an actual
purchase is made. Certifications of Stocks – Documents
IOUs A note acknowledging evidencing ownership of shares in a
indebtedness to the
corporation.
enterprise. Usually
prepared, signed, and
issued by employees
Time records/ timesheets – A detailed Step 4. General Ledger – The journal entries
record showing time-in and time-out of are posted to the general ledger
employees for a particular period of periodically.
time(usually every half-month).
Step 5. Worksheet: Unadjusted Trial
Check voucher – Form used to facilitate the Balance – Open accounts are prepared as
authorization of cash disbursement unadjusted trial balance.
transactions. A voucher contains the name
of the payee (the person or company to Step 6. Worksheet: Adjusting Entries –
receive cash paid by the enterprise), the Adjusting entries are prepared on the
reason for the disbursement (such as worksheet.
payment for goods purchased on account),
and the amount involved. Management Step 7. (Optional) Worksheet: Adjusted
affixes its signature on the voucher, Trial Balance – An adjusted trial balance is
evidencing approval of the cash prepared on the worksheet.
disbursement.
Step 8. Worksheet: Income Statement and
Journal Voucher – Document used for Balance Sheet Columns – Adjusted
transactions and journal entries for which accounts are extended to the worksheet
there is no other source document. Usually income statement, and balance worksheet.
prepared in connection with year-end
adjustments to the accounting records and Step 9. Income Statement, Owner’s Equity
for connecting errors in the records. Statement, Balance Sheet – The formal
financial statements are prepared.
THE ACCOUNTING PROCESS
Step 10. General Ledger AND General
Step 1. Transactions – A transaction is Journal – The adjusting entries from the
entered into by the business with a third worksheet are journalized and posted.
party person. The contract maybe oral or
written. Step 11. General Ledger AND General
Journal – The closing entries from the
Step 2. Documents – Transactions with income statement worksheet are
money consideration are considered. They journalized and posted.
are documented by invoices, receipts, etc.
Step 12. Post-closing Trial Balance and
Step 3. General Journal – The transactions General Journal – The post-closing trial
are analyzed and recorded in the general balance is prepared based on the open
journal, the book of original entry. balances in the general ledger.
RULES IN DEBIT AND CREDIT
Recording in the Journal Books
Simultaneously or after analyzing the
accounting elements, accountants record
the transactions in the books of accounts;
first in the Journal and then in the Ledger.

The journal provides a chronological record

of transactions with explanations and clear
references to their supporting documents
with corresponding debits and credits while
the ledger provides a classified record of
accounts with their respective running
balances

Both the journal an the ledger are necessary

for smooth business operations. For
example, the general journal can answer a
question regarding the amount of cash
received fro a particular transaction. On the
other hand the general ledger can answer
the amount of cash available as of a given
date.

It would be impracticable to prepare a

financial statement for a business after each
transaction. Instead, the transactions are
recorded in the accounting records, and the
information accumulated in these recrods is
used for the preparation of financial report
at periodic intervals.

The recording process in accounting does

not start with the writing of transactions
directly to the ledger. Accountatns generally
record transactions and events initially or
originally in the journal books. This is the
reason why this books is called the “book of
original entry”.
LEDGERING POSTING ILLUSTRATED
If the journal entry example is posted to
Steps in Ledgering the ledger, the process would look like
To effect the posting of economic 1. Using the account number locate
transactions from the general journal to the the account title in the ledger.
general ledger, the following procedures 2. Write the date of the journal entry
are generally observed. in the date column of the ledger.
3. Write in the journal reference
In the Ledger:
column (JR) of the ledger the page of
1. Locate the corresponding account in
the journal where the journal entry
the ledger
came from.
2. Transfer the following information
4. Transfer the debit amount from the
from the journal to the respective
journal entry to the debit column
account ledger:
per ledger, and the credit amount
- Date
per journal entry to the Credit
- Explanation
column per ledger.
- Debit or credit amount
3. Place the page of the journal where
Procedures for posting journal entries
the information transferred is
The process of transferring the entries from
located in the post reference column the journal to the accounts in a ledger is
of the ledger account called posting. Normally, posting is done at
In the Journal: the end of the month, when all journal
4. Place the post-reference column of entries for the month have been recorded.
the journal the number of the The following steps ar observed during
account as indicated in the ledger posting.
Posting to the ledger is usually
made periodically. The transactions 2. Using the account number (as
recorded in the general journal are provided for in the chart of
posted to the general ledger at the accounts) locate the account title in
end of the day, week or month the ledger.
depending on the needs of the
3. Write the date of the journal entry
business for an updated account
in the date column of the ledger
balance.

4. Write in the reference

column( journal reference or JR) of
the ledger the page of the journal
where the journal entry came from.
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.
Adjusting Entries year - maybe a calendar year
(starts in January and ends in
• Need for Adjustments December) or fiscal year (starts
- The Trial Balance is the source in any month to its 12th month,
of data needed in the like March as 1st month to
preparation of the financial February).
statements; however, this trial
Cash Basis and Accrual Basis in
balance does not show all
Income and Expenses Recognition
information needed in the
• Cash Basis
preparation of financial Revenue/Income and expenses are
statements for some of the recognized and recorded only
elements of the financial when cash is received or cash is
statements (assets, liabilities, paid, respectively.
equity, income and expenses) • Accrual Basis
are not completely or fairly Recognizes income and record it as
stated. Why is this so? it is earned regardless of when cash
is received or not; and the
- Because of some accounting
expense as it is incurred
principles that are to observed
regardless when it is paid or not.
and followed eg. Going concern • Moreover, the GAAP, require that
assumption, Periodicity principle the business use the accrual basis
& cash basis and accrual basis of principle.
accounting. Reason for Adjusting Entries
-  With the application of the above
e of Adjusting Entries accounting principles, particularly
- Going Concern Assumption - the accrual basis of accounting ,
that is, the business is some elements of the financial
expected to continue its statement are not fairly stated at
operation for an indefinite the time of the preparation of the
period of time, unless so Trial Balance;
expressed in case of  Henceforth, adjusting entries are
liquidation. prepared after the Trial Balance, to
- Periodicity Principle – that is, the present the correct amounts of
entity’s life is sub divided into each of the accounts comprising
equal time periods for these elements.
reporting purposes called  Thus, the Adjusted Trial Balance will
reporting periods. The present the true and fair Financial
accounting period maybe one Statement.
month, one quarter or one
  If the books or the accounts per received any payment from the client,
record in the books – Journal Book nor has issued the bill to the client.
and General Ledger, are not Since, the income is already earned,
adjusted, the Income Statement or though cash has not been earned yet,
Statement of Comprehensive income
Income would be erroneous: should be recognized as earned during
a. Expenses are understated – lower in the year. Adjusting entries is as follows -
amount than what it should be; and 2008
b. Profit is overstated – higher in amount Dec. 31 Accounts Receivable
than what it should be. P350,000
 And same with the Balance Sheet Consultancy Fee
accounts. P350,000
Adjustments for Service Business: 2b. Interest Income on Note Receivable:
1 - Accrued Expenses On Dec. 1, Dema-alaala Co. received a
 To take up expenses incurred in P90,000, 60-day, 12% note from Cousart
one period but remain unrecorded Co., its customer. The note matures on
or unpaid as of the end of the January 30, 2009 at which date, the
period e.g., salaries, rent and principal and the interest due on the
interest. note will be collected. On December 31,
 An accrued expense is an expense 2008, Dema-alaala Co. has earned
already incurred, but not yet paid by interest income fo
the company/enterprise. Because it
is not yet paid, it was not recorded Adjustments for Service Business:
in the books. 3 – Prepaid Expenses or Pre-collections
1a. Salaries Expenses: • To allocate expenses for two or
1b. Rent Expense: more accounting periods.
1c. Interest Expense • Prepaid Expenses Definition-
entities often make advance
Adjustments for Service Business: payment for services or
2 – Accrued Income expenditures which are still to be
• To take up income earned in one incurred or used up in the near
period but remain unrecorded future. Examples of advance
and/or not received as of the end payments or prepayments made
of the period. And same with include those for rent, insurance,
interest. advertising, and supplies.
• Example – Usually, the services or expenses
2a. Unrecorded Income Fees: On Dec. connected with these
31, ChingKit Co. has completed providing prepayments are received or
consultancy services to a client who enjoyed during the same period,
agreed to pay P350,000. As of the same either as a function of the passage
date (Dec. 31), the company has not of time (such as the case for rent or
 insurance) or use or consumption rendered or goods are delivered. Thus,
(such in the case of supplies). as of the date of payment, income is not
• A problem arises when at the yet earned since there was no
end of the period, a portion, if performance of service or delivery of
not the whole amount of the goods, like in the case of advance
economic benefits embodied by rentals received, or magazine
the advance payment has not subscriptions received in advance.
been used up or has not yet Usually, the advance payment is earned
expired. Hence, allocation as income during the same accounting
period, either as a function of time (such as
between the expired portion and
in rent) or due to performance of services
unexpired portion of the advance
and delivery of goods.
payment is required. The expired
portion is already an expense, A problem arises when at the end of
while the unexpired portion is an the period, a portion ( or even the whole
asset which in turn become amount) of the advance payment has
expense in the future accounting not yet been earned. Allocation between
period. the earned portion and the unearned
The adjusting entry for prepaid portion is required. The earned portion
expenses depends on the method is already income, while the unearned
used in recording payments. portion is a liability which will in turn
become income in the future accounting
• Asset Method - The advance
periods.
payment was entirely debited to
The adjusting entry for unearned
an asset account, say
income depends on the method used in
Prepaid Rent
recording advance collections received,
• Expense Method - The advance
either liability or income
payment was entirely debited to
Liability Method - The cash received in
an expense account, such as Rent
advance is credited to a liability account,
Expense
such as Unearned
Rent Income.
Adjustments for Service Business:
Income Method - The cash received in
4 – Unearned Income/Revenue/Unused
advance is
Asset
credited to an income
account,
• To allocate income to two or
such as Rent Income.
more accounting periods.
• Unearned Income Definition:
• Adjustments for Service Business:
Unearned income (or
5 - Depreciation
deferred revenue) represents cash
received in advance or services or
goods, even before such service is
 • To recognize the amount of used of the original cost of the asset
economic benefits of a fixed asset in the balance sheet; to
for the accounting period. determine the asset book value
• Depreciation Definition: (remaining value), this contra
Depreciation is the systematic asset-account, “accumulated
allocation of the cost of the fixed depreciation” is deducted from
asset over its useful/service life. It the asset original value or
is a process of cost allocation and acquisition cost. The credit balance
not asset valuation. in the Accumulated Depreciation
• When a company acquires long- represents the total cost that
lived assets like buildings, have been charged to expense.
machinery, equipment, vehicles, There are 3 factors involved in
computers and office furniture, it computing depreciation: cost of the
is basically buying for the asset, residual value, and useful or
usefulness of the assets for these productive life – expressed in number of
asset help generate revenues for the years or number of machine hours or
business. Therefore, it is proper that a number of units produced. Accountants
portion of each of these assets be developed a number of methods for
recorded or accounted as part of estimating depreciation, the simplest and
expense during each of the accounting most used method, known as “straight
period. line method” is outlined as follows:
Fixed assets are recorded at their Annual depreciation = cost -
acquisition cost, which comprises the residual values estimated life (years)
purchase price, freight, insurance, Other names for residual value are – scrap
installation and other related expenses in value or salvage value.
bringing the assets for use. • Example –
Fixed assets, with the exception of land, On January 1, 2008, Starship Co.
have limited useful lives and as such are bought a machine for a total cost of
subject to depreciation. At the end of P250,000 which amount includes all
an asset economic life, an asset may still incidental expenses. The machinery is
command a price known as “residual estimated to have a useful life of 10
value”, or also named as scrap value, years after which the asset could be sold
“salvage value” or “disposal value”. for P50,000. Using the straight line
• In recording depreciation expense, method, the annual depreciation expense
the used-up portion of the asset is –
cost is not directly credited to Annual P 250,000 - P50,000
reduce its amount, rather a contra Depreciation = 10
asset account called “Accumulated = P20,000
Depreciation” is set up. The contra
account – accumulated The adjusting entry to record the asset
depreciation, allows the disclosure expense:
 2008 Receivable (figure depends on
Dec. 31 Depreciation Expense firm’s experience) or to be exact,
P20,000 equal to the amount due from a
Accumulated customers of whom is possibly
Depreciation - P20,000 not paying or be will unable to
Machinery pay the account anymore despite
• The Depreciation Expense account efforts of collection from the firm.
is to be shown as an expense in • Two Methods:
the Income Statement; the Possible uncollectible account can be
Accumulated Depreciation – directly written off (1) at the end of the
Machinery will be shown in the accounting period. The adjusting entry –
Balance Sheet as a deduction 2008
from the cost of the asset. Dec. 31 Bad Debts xxx
Accounts Receivable
• The difference between cost and xxx
the accumulated depreciation is or
the asset book value or carrying Like, depreciation, a contra–asset
amount, thus account – “Allowance for Bad Debts” (2)
Machinery - can first be set-up. The Allowance for
P250,000 Bad Debts account or a portion of this
Less: Accumulated Depreciation - account, once truly found
20,000 impossible for collection despite firm’s
effort is now debited to Bad Debts.
P230,000 Recording are –
At the end of each year (for 10 years) a • To set up:
similar adjusting journal entry shall be Allowance for Bad Debts xxx
recorded. We call this recurring entry. At Accounts Receivable
the end of 10th year, the accumulated xxx
depreciation will bring about an asset (this entry reduces the accounts
balance of P50,000 at which point, the receivable by the amount possible for
book value of the asset will be equal to nonpayment)
the residual value. • Once confirmed no collection now
• Adjustments for Service Business: or in the future, entry:
6 – Bad Debts Bad Debts xxx
• To recognize the possible Allowance for Bad Debts
uncollectible amounts due from xxx
customers at the end of the
accounting period.
• Bad debts Recognition: Bad debts
is normally a portion or
percentage of the total Accounts
 journal entries are automated with the
completion of the source document.

Example: Payment of tuition fee when company

is using a computed based acctg. System :

The computer system attached to the

accounting system would produce the Official
receipt… and once the receipt is printed –
Journal entries are recorded automatically in
the Journal Record.

In manual acctg. – journal entries are recorded

in the Journal Book.

3. The so – called Accounting equation:

Assets = Liabilities + Equity;

Expanded Accounting Equation:

JOURNALIZING Process – 1st Accounting Assets = Liabilities + Equity + Income – Expenses

process:

Things to Understand and Remember in

Journalizing:
4. The output of accounting system or
process:

1. Type of Business: Service,

The Income Statement:

Merchandizing (Retail and Wholesale Makes use of the 2nd portion of the expanded
accounting equation: Income - Expenses
or Buy and Sell), Manufacturing.

2. The difference b/w manual acctg. The Balance Sheet:

System and computer based
Makes use of the Basic
accounting system.. Manual acctg.
System records on the basis of the Accounting Equation:
source document/s. For computer
based acctg. System – source Assets = Liabilities +
document/s is generated with the
consummation of the transaction, and Equity
 Statement of Cash Flow record keeping. Where specifically,
Debit amount = credit amount.
Statement of Changes in Equity Meaning – for every value received
there is a corresponding value parted
with. Example: When you pays rental,
You gave out cash for the equivalent
5. The 5 Elements of Accounting and value of space you occupied (received).
their corresponding Account Titles –
used in journalizing. 7. To clearly, thoroughly remember the
rules of debit and credit, remember
only the expanded accounting equation.
The elements and some of their account titles
are:

Assets: Cash, Accounts a) Assets = Liabilities + Equity + Income –

Receivables/Collectibles, Expenses.

Furniture & Fixtures, Equipment, Land,

Building Note: To be able to use this in journalizing,
understand that the equation is divided into 2
sides: Before the equation sign is the debit
Liabilities: Loan, Accounts Payable, Notes (Dr.) side and After the equation sign is the
Payable, and all others with the 2nd name credit (Cr.) side. All the more, we debit Assets
Payable. in order to increase its amount and we credit it
to decrease the asset amount. On the other
hand, we credit Liabilities, equity and Income to
Equity: Capital (an addition to the capital) increase their amount; to decrease, we credit
Drawings or Withdrawals (these are deduction them. But, take a look at the Expenses – since it
from capital) Income: Or these are sources of is a deduction in the equation, to increase we
revenue…Account titles include revenue, have to debit it.. and to decrease we have to
income, sales (for merchandising or buy and credit it..
sell)

Asset = Liability; (when you receive cash

from a loan of 100,000 from a bank (PNB) …
Expenses: Purchases (of goods or services) is an your cash is increase and liability also increased.
expense account particularly for merchandising Specifically, debit cash (to Increase asset,
business, Rent, salaries, specifically cash) and you debit Loan (to
Depreciation, utilities (cost of electricity), increase liability)
transportation, and many more.
The corresponding J/E is as follows:

6. Rules of Debit and Credit - because

accounting makes use of double entry
 Cash 100,000 Transpo expense 30.00
(your debit entry) Cash
Loan, PNB 30.00
100,000 (your credit
entry) A 3- year loan with
12% interest per annum
e. Value Added Tax (VAT) - Vat or e-Vat (for
expanded value added tax) is the sales tax for all
b. purchases and sales of goods/merchandize or
services. It is 12% of the value being considered.
In here, 2 account titles are used: Input Vat
Asset = equity (example: you invested and
100,000 to your water station business as
Output Vat
the owner. With this your asset and equity
Input Vat is used in case of purchases because
account will be affected.
the reason is that the goods or services gets
The corresponding J/E is as follows: into the company. On the other hand, Output
Vat is used in case of sales for the reason that
Cash 100,000
the goods or services goes out of the company.
Jose Cruz, Capital
100,000
Example:
T-shirt Printing Enterprise purchased plain
c. white t-shirts in cash for the basketball uniform
Asset = Income ; Example In ordered from them by one basketball team –
your water station business you reserve for the upcoming competition. 100 pcs. of
payments of 3,000 for water deliveries in these plain white t-shirts cost then P12,000.
the day of Jan 15, 2018 They also purchased cloth ink for use in the
printing job cost P5,000 cash.
At the completion of task, the Enterprise billed
2018 the basketball team P20,500 for the 100 t-shirts
Jan 15 Cash 3,000 and was paid immediately by the basketball
team.
Income
3,000
J/E –
Total income received
For the day
a. For the purchase of
the t-shirts:
d. expense = Asset Example: you
paid your fare (30.00) to cubao…
You debit transpo (to increase) and Purchases: T- shirts
you credit cash (to decrease) 12,000
 Input Vat Cash
1,440 22,960
Cash Sales
20,500
13,440 Output Vat
Payment for the 100 pcs 2,460
White t-shirts purchased To record cash sales –
Basketball uniform

All the more, we need

too to understand the
application of VAT:
b. For the purchase of Vat – Inclusive - meaning
cloth ink: evat in integrated already
in the amount considered;
and
Purchases: Cloth ink
5,000 Vat – Exclusive – meaning evat
in not yet incorporated or
Input Vat
integrated in the amount
600 considered.
Cash
5,600
In the above given examples, the
Payment for the cloth
evat were all treated as
ink
purchased vat-exclusive, where we simply
added to the amount considered
the 12% evat.

In case of evat-inclusive our computation and

c. For the payment of J/E in the same sample problem will

the completed
uniform:
a. The purchase of
the 100 t-shirts for (computation:
12,000 cash : 5,000/1.12 = 4,464.30)

Purchases: T- shirts
10, 714.30
Input Vat c. For the payment of
1,285.70 the completed
Cash uniform, Vat
12,000 inclusive, 20,500:
Payment for the 100 pcs
White t-shirts purchased Cash
(computation: 20.500
12,000/1.12 = Sales
18,303.60
10,714.30)
Output Vat
2,196.40

To record cash sales –

b. For the purchase of
Basketball uniform
cloth ink, amount
(computation: 20,500/1.12 = 18,
pair was 5,000: 303.60)

Purchases: Cloth ink

4,464.30
Input Vat
535.70
Cash
5,000
Payment for the cloth
ink
Purchased