2-1

CHAPTER 5

Double Entry
Bookkeeping
 2-2

First, however, let’s look at...

The
Accounting
Cycle
 The First Four (4) Steps in The Accounting 2-3

Cycle

Gathering Journalize Post entries to Prepare a trial

of transactions the accounts balance.
documents. in the general in the general
journal. ledger.
 2-4

The T-Account

Increases to the
T-account are
recorded on Account Name
one side of the Left Right
Side Side
T-account, and
decreases are
recorded on the
other side.
 2-5

The T-Account

 Debit refers to the

LEFT and Credit to
the RIGHT side of the
T-Account. Account Name
 Tools used for Left Right
recording Side Side or
transactions or Credit
Debit Side
 Debit (DR)
Side
 Credit (CR)
 2-6

Types of Accounts

Let’s see how

debits and
credits affect Account Name

the different Debit Credit

types of
accounts.
 2-7

Types of Accounts

Assets
Assets

Liabilities
Liabilities

Owner’s
Owner’s Equity
Equity

Drawing
Drawing

Revenues
Revenues

Expenses
Expenses
 2-8

Using Debits and Credits

 Again, debits and credits are used to
increase or decrease account balances.
 Determining whether to use a debit or
credit to record an increase or decrease
depends on the type of account in
question.
 The Accounting equation is the basis
for the determination.
 2-9

Accounting Equation
(Revisited)

A = L + OE
 2-10

Accounting Equation
(Revisited)
Assign
Assign aa T-Account
T-Account to
to each
each element
element of
of the
the
Balance
Balance Sheet
Sheet Model
Model

A = L + OE
Account Name Account Name Account Name
Debit Credit Debit Credit Debit Credit
 2-11

Accounting Equation
(Revisited)
Debits
Debits and
and credits
credits affect
affect the
the Balance
Balance Sheet
Sheet
Model
Model as
as follows:
follows:

A = L + OE
ASSETS Account Name Account Name
Debit Credit Debit Credit Debit Credit
for for
Increase Decrease
 2-12

Accounting Equation
(Revisited)
Debits
Debits and
and credits
credits affect
affect the
the Balance
Balance Sheet
Sheet
Model
Model as
as follows:
follows:

A = L + OE
ASSETS LIABILITIES Account Name
Debit Credit Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase
 2-13

Accounting Equation
(Revisited)
Debits
Debits and
and credits
credits affect
affect the
the Balance
Balance Sheet
Sheet
Model
Model as
as follows:
follows:

A = L + OE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
 2-14

Owner’s Equity
A Closer Look
Recall
Recall that
that Owner’s
Owner’s Equity
Equity consists
consists of
of the
the
following
following components:
components:

Capital – Drawings + Revenues - Expenses

 2-15

Owner’s Equity
A Closer Look
Because
Because Capital
Capital accounts
accounts increase
increase
Owner’s
Owner’s Equity,
Equity, they
they are
are affected
affected by
by debits
debits
and
and credits
credits as
as follows:
follows:

Capital
Debit Credit
for for
Decrease Increase
 2-16

Owner’s Equity
A Closer Look
And
And because
because Drawing
Drawing accounts
accounts decrease
decrease
Owner’s
Owner’s Equity,
Equity, they
they are
are affected
affected by
by debits
debits
and
and credits
credits as
as follows:
follows:

Drawing
Debit Credit
for for
Increase Decrease
 2-17

Owner’s Equity
A Closer Look
Because
Because Revenue
Revenue accounts
accounts increase
increase
Owner’s
Owner’s Equity,
Equity, they
they are
are affected
affected by
by debits
debits
and
and credits
credits as
as follows:
follows:

Revenue
Debit Credit
for for
Decrease Increase
 2-18

Stockholders’ Equity
A Closer Look
And
And because
because Expense
Expense accounts
accounts decrease
decrease
Owner’s
Owner’s Equity,
Equity, they
they are
are affected
affected by
by debits
debits
and
and credits
credits as
as follows:
follows:

Expense
Debit Credit
for for
Increase Decrease
 2-19

Normal Balances

Each of the 6 account types also has a

normal balance side. It is always the
side which is used to record increases
in the account.
 2-20

Normal Balances
The normal balances for each of the SIX
types of accounts are as follows:

Account Name
Debit Balance Credit Balance
Assets Liabilities
Expenses Capital
Drawings

Revenues
 2-21

Debits and Credits

Question 1
Which of the following accounts would
normally be expected to have a debit
(or left-side) balance?

a. Accounts Payable
b. Buildings
c. Interest Revenue
d. Torres, Capital
 2-22

Debits and Credits

Solution 1
Which of the following accounts would
normally be expected to have a debit
(or left-side) balance?
BUILDINGS
BUILDINGSisisan
anasset
asset
a. Accounts Payable account
accountand
andnormally
normally
b. Buildings has
hasaaDEBIT
DEBITbalance.
balance.
c. Interest Revenue
The
Theother
otherthree
three
d. Capital Stock accounts
accountsnormally
normally
have
haveCREDIT
CREDITbalances.
balances.
 2-23

Debits and Credits

Question 2
Which of the following accounts would
normally be expected to have a credit
(or right-side) balance?

a. Accounts Receivable
b. Salary Expense
c. Salary Payable
d. Land
 2-24

Debits and Credits

Solution 2
Which of the following accounts would
normally be expected to have a credit
(or right-side) balance?

a. Accounts Receivable
b. Salary Expense
c. Salary Payable
d. Land
 2-25

Debits and Credits

Solution 2
Which of the following accounts would
normally be expected to have a credit
(or right-side) balance?
SALARY
SALARYPAYABLE
PAYABLEis isaa
liability
liability account
account and
and
a. Accounts Receivable
normally
normallyhas hasaaCREDIT
CREDIT
b. Salary Expensebalance.
balance.
c. Salary Payable
The
The other
other three
three accounts
accounts
d. Land normally have DEBIT
normally have DEBIT
balances.
balances.
 2-26

Debits and Credits

Example
If the balance in Accounts Receivable
(an asset) is P750 (debit side balance),
Accounts Receivable

750
 2-27

Debits and Credits

Example
If the balance in Accounts Receivable
(an asset) is P750 (debit side balance),
Accounts Receivable

750

What would we do to increase the account by

$200?
 2-28

Debits and Credits

Example
If the balance in Accounts Receivable
(an asset) is P750 (debit side balance),
Accounts Receivable

750
200

What would we do to increase the account by

$200?
 2-29

Debits and Credits

Example
If the balance in Accounts Receivable
(an asset) is P750 (debit side balance),
Accounts Receivable

750
200

What would we do to increase the account by

$200?
What would we do to decrease the account by
$350?
 2-30

Debits and Credits

Example
If the balance in Accounts Receivable
(an asset) is P750 (debit side balance),
Accounts Receivable

750 350
200

What would we do to increase the account by

$200?
What would we do to decrease the account by
$350?
 2-31

Gathering of Documents
1. Official Receipts
2. Invoices (Service/Sales/Purchase)
3. Vouchers (Check/Cash)
4. Checks
5. Promissory Notes
6. Statement of Account
7. Journal Vouchers
8. Contracts
9. Payroll Sheet/Report
 Gathering of Documents –
Official Receipts

5-32 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents –
Invoice (Service, Sales, Purchases)

5-33 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents–
Vouchers (Checks, Cash)

5-34 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents –
Checks

5-35 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents–
Promissory Notes

5-36 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents–
Statement of Account

5-37 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents–
Journal Vouchers

5-38 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents–
Contracts

5-39 © 2005 McGraw-Hill Ryerson Limited.

 Gathering of Documents–
Payroll Report

5-40 © 2005 McGraw-Hill Ryerson Limited.

 2-41

Chart of Accounts
The listing of all accounts and their
account numbers is called the chart of
accounts.
accounts
A typical account numbering scheme
might appear as follows:
Assets
Assets 100-299
100-299 Revenues
Revenues 600-699
600-699
Liabilities
Liabilities 300-499
300-499 Expenses
Expenses 700-799
700-799
Equities
Equities 500-599
500-599

(See page 94 to 95)

 2-42

Recording Transactions
 Initially, all transactions are recorded in
the General Journal,
 2-43

Recording Transactions
 Initially, all transactions are recorded in
the General Journal.
 Each transaction always affects at least
two different accounts.
 One account has a debit effect.
 The second account has a credit effect.
 This methodology was named “double
entry” accounting by whom?
Pacioli
 2-44

General Journal
GENERAL JOURNAL
Page:

Date Account Title and Explanation F Debit Credit

 2-45

Journal Entries
Example 1
On January 1, 2015, Caldwell Company
borrows P10,000 from the bank
evidence by a promissory note.
Prepare the appropriate general journal
entry for the above transaction.
 2-46

Journal Entries
Solution 1
 Two accounts are affected:
 Cash is increased by P10,000.
 Notes Payable is increased by P10,000.
 2-47

Journal Entries
Solution 1
 Two accounts are affected:
 Cash is increased by P10,000.
 Notes Payable is increased by P10,000.

GENERAL JOURNAL
Page: 1
Date Account & Explanation F Debit Credit
 2-48

Journal Entries
Solution 1
 Two accounts are affected:
 Cash is increased by $10,000.
 Notes Payable is increased by $10,000.

GENERAL JOURNAL
Page: 1
Date Account & Explanation F Debit Credit
Jan 1 Cash 10,000
Notes Payable 10,000
to record loan from bank
 2-49

Journal Entries
Example 2
On January 15, 2015, Caldwell Company
purchases a truck for P19,500. Terms:
P10,000 down, balance on account.
Prepare the appropriate journal entry for the
above transaction.
 2-50

Journal Entries
Solution 2
 Three accounts are affected:
 Trucks is increased by P19,500.
 Cash is decreased by P10,000.
 Accounts Payable increased by P9,500.
 2-51

Journal Entries
Solution 2
 Three accounts are affected:
 Trucks is increased by P19,500.
 Cash is decreased by P19,500.
 Accounts Payable increased by P9,500.

GENERAL JOURNAL
Page: 1
Date Account & Explanation F Debit Credit
 2-52

Journal Entries
Solution 2
 Two accounts are affected:
 Trucks is increased by P19,500.
 Cash is decreased by P19,500.
 Accounts Payable increased by P9,500.

GENERAL JOURNAL
Page: 1
Date Account & Explanation F Debit Credit
Jan 15 Trucks 19,500
Cash 10,000
Accounts Payable
to record purchase of truck 9,500
 2-53

Journal Entries
Example 3
On January 20, 2015, Caldwell Co. pays
the P400 electric bill for January.
Prepare the appropriate journal entry
for the above transaction.
 2-54

Journal Entries
Solution 3
 Two accounts are affected:
 Utility Expense is increased by P400.
 Cash is decreased by P400.
 2-55

Journal Entries
Solution 3
 Two accounts are affected:
 Utility Expense is increased by P400.
 Cash is decreased by P400.

GENERAL JOURNAL
Page: 1
Date Account & Explanation F Debit Credit
 2-56

Journal Entries
Solution 3
 Two accounts are affected:
 Utility Expense is increased by P400.
 Cash is decreased by P400.

GENERAL JOURNAL
Page: 1
Date Account & Explanation F Debit Credit
Jan 20Utility Expense 400
Cash 400
to record payment of
Jan.
electric bill
 2-57

POSTING to the General Ledger

 General Ledger (GL) is a complete collection of
all the accounts of a company
 Accounts are individually numbered for easy
reference
 It is used to collect the information about all of
the transactions affecting a specific account
 A cumulative, running balance is maintained
when using the 3-column type
 2-58

Two General Ledger Account

Formats
 Three-Amount Column Format
(Debit, Credit, Balance)
 Used in general ledgers in the business
world
 T-Account Format
 Used primarily for teaching and analysis
of complex transactions
 2-59

General Ledger Account

Three-Amount Column Format

ACCOUNT NAME: ACCOUNT No.

1 2 3
Date Explanation F Debit Credit Balance
 2-60

Categories of
General Ledger Accounts
The six types of accounts fall into one of
two categories

Real
Real Accounts
Accounts

Nominal
Nominal Accounts
Accounts
 2-61

Real Accounts
 This category includes Assets,
Liabilities, and Owner’s Equity (i.e.,
Balance Sheet accounts)

 Accounts are permanent.

 Account balances are carried forward

from one fiscal year to the next.
 2-62

Nominal Accounts
 Nominal accounts include revenues
and expenses.
 Nominal accounts are temporary.
 Nominal account balances are closed
out to zero at the end of the fiscal year.
 Closing Entries will be discussed in
Chapter 8.
 2-63

Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Account & Explanation F Debit Credit
Jan 1 Cash 10,000
Notes Payable 10,000
to record loan from bank

Start with the journal entry from the

General Journal.
 2-64

Posting to the GL
Example
GENERAL JOURNAL
Next, find the appropriate Page: page 1
Date in the General
Description Ledger
PR forDebit
Cash. Credit
Jan 1Cash 10,000
Notes Payable 10,000
to record loan from
bank
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description F Debit Credit Balance
Beginning Balance 0 0
 2-65

Posting to the GL
Example
GENERAL JOURNAL
Post the account referencePage:
number. 1
Date Account & Explanation F Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank

ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description PR Debit Credit Balance
Beginning Balance 0 0
 2-66

Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description F Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank

ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description F Debit Credit Balance
Beginning Balance 0 0
1-JanLoan G1 10,000

Post the transaction info to the GL.

 2-67

Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank

ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description PR Debit Credit Balance
Beginning Balance 0 0
1-JanLoan G1 10,000 10,000

Update the General Ledger balance.

 2-68

Posting to the GL
Example
GENERAL JOURNAL
Next, find the Notes Payable
Page: 1
Date pageDescription
in the GeneralPRLedger.
Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank

ACCOUNT NAME: Notes Payable ACCOUNT No. 201

Date Description PR Debit Credit Balance
Beginning Balance 0 0
 2-69

Posting to the GL
Example
GENERAL JOURNAL
Post the account referencePage:
number. 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank

ACCOUNT NAME: Notes Payable ACCOUNT No. 201

Date Description PR Debit Credit Balance
Beginning Balance 0 0
 2-70

Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank

ACCOUNT NAME: Notes Payable ACCOUNT No. 201

Date Description PR Debit Credit Balance
Beginning Balance 0 0
1-JanLoan G1 10,000

Post the transaction info to the GL.

 2-71

Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank

ACCOUNT NAME: Notes Payable ACCOUNT No. 201

Date Description PR Debit Credit Balance
Beginning Balance 0 0
1-JanLoan G1 10,000 10,000

Update the General Ledger balance.

 2-72

Posting to the GL
Example
GENERAL JOURNAL
Examine the next journalPage:
entry. 1
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 9,500
to record purchase of truck

ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description PR Debit Credit Balance
Beginning Balance 0 0
1-JanLoan from bank G1 10,000 10,000
 2-73

Posting to the GL
Example
GENERAL JOURNAL
Record the account reference.
Page: 1
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck

ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description PR Debit Credit Balance
Beginning Balance 0 0
1-JanLoan from bank G1 10,000 10,000
 2-74

Posting to the GL
Example
GENERAL JOURNAL
Page: 3
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck

ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description PR Debit Credit Balance
Beginning Balance 0 0
1-JanLoan from bank G1 10,000 10,000
15-JanPurchase of truck G3 9,500

Post the entry to the GL.

 2-75

Posting to the GL
Example
GENERAL JOURNAL
Page: 3
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck

ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description PR Debit Credit Balance
Beginning Balance 0 0
1-JanLoan from bank G1 10,000 10,000
15-JanPurchase of truck G3 9,500 500

Update the General Ledger balance.

 2-76

TRIAL BALANCE
 Used to periodically test whether the
General Ledger is in balance.

 Consists of a listing of each account

with its balance as of a specific date.
 All Debit balances are in one column.
 All Credit balances are in another column.
 2-77

Trial Balance Illustration

First Company
Trial Balance
Dec. 31, 2015

Debits Credits
Cash P 500
Accounts Receivable 1,200
Equipment 3,800
Accounts Payable P 700
Notes Payable 1,450
Capital Stock 3,000
Retained Earnings - 1/1/X8 -
Dividends 250
Revenues 11,000
Salary Expense 5,000
Utility Expense 3,000
Rent Expense 2,400
P 16,150 P 16,150
 2-78

Trial Balance Illustration

(Text example is on p. 79)
First Company
Trial Balance
Dec. 31, 2015

Debits Credits
Notice
Cash that
Notice that P 500
Accounts Receivable 1,200
Total
Total Debits
Equipment are
Debits are 3,800

equal to
equalNotes Total
Accounts Payable
toPayable
Total
P 700
1,450
Credits.
Capital Stock
Credits.
Retained Earnings - 1/1/X8
3,000
-
Dividends 250
Revenues 11,000
Salary Expense 5,000
Utility Expense 3,000
Rent Expense 2,400
P 16,150 P 16,150
 2-79

Trial Balance Errors

Click picture to view video

 Errors that will not cause the
trial balance to be unequal:
1. Failure to record a transaction or to post a
transaction.
2. Recording the same erroneous amount
for both the debit and the credit parts of a
transaction.
3. Recording the same transaction more
than once.
4. Posting a part of a transaction correctly as
a debit or credit but to the wrong account.
Chapter 5

The
The End
End
 2-83

Have you ever

had that “I’ve-
just-been-run-
over-by-a-
train” feeling?