Lesson Perform Bookkeeping Tasks

In the previous lesson, you learned how to

What’s In
make and prepare a business plan, operate the
business, know how to sell the product, and the
significance for keeping business records.

A business plan is an effective tool in making your dream business come true.
It reiterates different plans or strategies in Operation and Administration, Marketing,
Production and Logistics, Finance, etc.

The operational plan put into details on what business model you are going to
employ and how are you going to start the business. Among others, its also reiterated
the layers pf management, type of skills and employee attitude your business need
and the steps on how to get the government license.

The marketing plan contains valuable strategies as to what product your are
going to produce or sell, what industry you want to enter, group of target customers,
or your target market and the business model or strategies you are going to employ.

The production plan revealed the production processes and the quality control
system of the goods produced for sale. While the logistics provides a channel of
distribution of the goods from production lines down to the wholesellers/retailers or
directly to consumers.
The financial plan talks about monetary requirements before you open the business.
While financial forcast informs the business owners of the expected outcome of the
business in monetary terms.

What’s New

What is Bookkeeping?

Bookkeeping is the process of recording business transactions in a systematic

and chronological manner.

It is systematic because it follows procedures and principles. On the other

hand, it is chronological because the transactions are recorded in order of the date
of occurrence.

Bookkeeping is the starting point of the accounting process. A sound

bookkeeping system is the foundation for gathering the information necessary to
answer questions related to profitability, solvency and liquidity of the business.

What is a Bookkeeper?

Each business has a bookkeeper who is incharge to record, maintain and

update business records from all sorts of financial transactions using account title that
can be found in the charts of accounts already set up by the Accountant.

The bookkeeping function dictates the bookkeeper to keep track of all financial
transactions of the business. Only transactions that has monetary value will be
recorded.

The bookkeeper uses the Book of Accounts to record the business

transactions which is to be consolidated later to help construct financial statement such
as the Trial Balance, Income Statement and Balance Sheet.
What is a Book of Account?

The book of accounts are composed of the Journal and Ledger. It depends on
the type of business, some businesses used special journals when they are engaged
merchandising type of business to records business transactions. This module will
cover and provide example for service oriented business. Thus, only journal and ledger
will be used in the succeeding examples.

There are two types of books used in recording business transactions. They are
called journals and ledgers.

Journal refers to the book of original entry while the Ledger refers to the book
of final entry.

What is a General Journal?

The general journal is the most basic journal which provides columns for date,
account titles and explanations, folio or references and a separate column for debit
and credit entries. Depicted in figure 1 below is a sample format of a general journal:

Figure 1 – General Journal

What is a General Ledger?

The general ledger is a grouping of all accounts directly traceable to chart of

accounts. These accounts will be reflected in the financial statements as a summary
of all financial activities that have taken place as recorded in the general journal and
subsidiary ledgers. Depicted in figure 2 below is a sample format of a general ledger:

Figure 2 – General Ledger

What is a Subsidiary Ledger?

The subsidiary ledger is a group of accounts directly associated from the

general ledger. This record is created to maintain individual accounts for customers
and vendors whose cash is not being used as a medium of exchange when purchasing
or selling merchandise. Depicted in figure 3 and 4 below is a sample format of a
subsidiary ledgers Accounts Receivable and Accounts Payable respectively:

Accounts Receivable

Buyer/Customer: Veggies Trading 11

Figure 3 – Accounts Receivable Ledger

Figure 4 – Accounts Payable Ledger

The Rules of Debit and Credit

In the process of journalization, following the rules of Debit and Credit are
essential part to ensure accurate recording and sound decision making. Debit is
abbreviated as DR while CR for Credit.
 It is a requirement that the bookkeeper is able to master the normal balance of
each account title before performing the tasks of bookkeeper.
When to Debit?
When cash or non-cash items are received, the said cash or non-cash items must be
recorded in the debit column. This means that the debit balance increased. It is called
Value Received.

When to Credit?
When cash or non-cash items are given, the said cash or non-cash items must be
recorded in the credit column. This means that the credit balance is increased. It is
called Value Parted With.

The following steps will be undertaken in determining account balances for every
account title such as cash, account receivable, etc.:

1. Add all the debit side to generate total debit 2.

Add all the credit side to generate total credit.
3. Subtract total debit to the total credit.
4. Determine the balance of each account.

Depicted in figure 5 below is a matrix of normal debit and credit balances of

Five Major Accounts:
Account Type Debit Credit
Assets
Liabilities
Owner’s Equity
Revenue
Expenses

Figure 5 - Matrix of Normal Debit and Credit Balances

of Five Major Accounts
 In order to fully understand the concept of debit and credit balances, depicted
in figure 6 below is a matrix of normal debit and credit balances under each of the five
major accounts:

Account Type Debit Credit

Assets
Cash on Hand
Cash in Bank
Accounts Receivable
Allowance for Doubtful
Accounts
Notes Receivable
Prepayments
Inventories
Land
Building
Equipment
Accumulated
Depreciations
Other Assets
Liabilities
Accounts Payable
Notes Payable
Salaries Payable
Mortgage Payable
Unearned Fees
Owner’s Equity
Capital
Drawing
Revenue
Service Income
 Other Income
Expenses
Rent Expense
Utilities Expense
Depreciation Expense
Salaries and Wages
Expense
Other Expenses

Figure 6 - Matrix of Normal Debit and Credit Balances

of Sub-accounts

TRIAL BALANCE

Trial balance is a list of all ledger accounts with closed or final balances on a certain
period arranged according to the rules of debit and credit. The debit and credit columns
must be equal in total amount. This is the first report prior to financial statement
preparation. Depicted in figure 7 below is a sample format of a trial balance report with
peso amount.

As you can observed,

the accounts reflected in
figure 7 above are arranged
according to the proper
placement of the five major
accounts. The Assets,
Liabilities, Owner’s Equity,
Revenue and Expense
accounts. You may refer to
figure 6.

On the other hand, the trial

balance report Figure 7 – Sample format of a Trial Balance has two phases.
The first phase “Unadjusted trial
balance” is a report of all balances after the posting of the general ledger accounts.
The general ledger account balances are extracted to construct the unadjusted trial
balance. Meanwhile, the second phase is the “Adjusted trial balance”. This phase is a
final report of trial balance after all necessary adjustments in journal entries are posted
in the general ledger.

What is an Adjusting Entry?

Making an adjusting entry helps the bookkeeper capture all financial events
happened over a period of time within the accounting cycle. It is essential in keeping
the financial record updated. The bookkeeper is going to look or examine accounts
that needs to be updated. Outlined below are the five basic sources of adjusting
entries:
1. Depreciation expense
2. Deferred expenses of prepaid expenses
3. Deferred income of unearned income
4. Accrued expenses of accrued liabilities
5. Accrued income or accrued assets

1. Depreciation

This is a method of allocating the cost of an asset to an expense over the

accounting periods that make up the asset’s useful life. Examples of assets subject to
depreciation are: Store, Office, Building, and Transportation equipment. These types
of assets lose their ability to provide useful service as time passes. Depreciation can
also be referred to as the decrease in the usefulness of these types of assets. Take
note that Land is not subject to depreciation because the value of land mostly
increases as time passes.

There are several methods or formulas to compute the amount of depreciation.

The simplest is the straight-line method.

The formula:
 (Acquisition Cost – Salvage or Residual Value)
Annual Depreciation =
Useful Life

Where:
• Acquisition cost – the actual cost of the asset acquired.
• Salvage value – the selling price of the asset upon reaching the useful
life.
• Useful life – is the economic or productive life of the asset.

Illustrative problem:

The cost of the equipment is PHP25,000. It was estimated to have a useful life of
five years. It is estimated that after five years, the office equipment can be sold at a
scrap value of PHP1,000. To compute for the monthly depreciation, just divide the
annual depreciation by 12. One year is composed of 12 months.

(P 25,000 – P 1,000)
P 400 =
60 months

- (5 yrs x 12 mos. = 60 months)

Adjusting entry:
GENERAL JOURNAL PAGE 1

POST.

DATE PARTICULARS REF. DEBIT CREDIT

1 June 30 Depreciation expense 400.00
Accumulated depreciation – (equipment
2 name) 400.00
To record the allocation of
3 depreciation expense

The depreciation expense is an allocated for all sixed assets except land.
Example are building, equipment and or machineries that the business is using to
generate income. It shall be reported as an expense account in the income statement
directly attributable in the said fixed assets. While the accumulated depreciation is a
balance sheet account but treated as a contra-account to the concerned fixed asset.

Refer to the illustration below:

Balance Sheet
As of ____________

Equipment (at cost) P 25,000

Less: Accumulated Depreciation-Equipment 400
Net Book value of Equipment P 24,600

2. Deferred Expenses or Prepaid Expenses

These are items that have been initially recorded as assets but are expected to
become expenses over time or through the operations of the business.

In order to recognize the correct amount of expenses, prepayments shall be

amortized weekly, semi-monthly or monthly, depending on its nature and purpose.

Illustrative problem:

Purchased P5,000 worth of office supplies on account. By the end of the month,
PHP2,000 worth of these supplies are still unused.

Adjusting entry:
GENERAL JOURNAL PAGE 1

POST.

DATE PARTICULARS REF. DEBIT CREDIT

1 June 30 Supplies expense 3,000
2 Supplies 3,000
3 To set up the value of used supplies.
 The supplies expense is an income statement account, while the supplies which
is now credited is an asset account. All asset has a normal debit balance. Considering
that the supplies in this record is credited. This will be deducted to the supplies account
in the balance sheet to generate the remaining balance in supplies.

3. Deferred income of unearned income

These are items that have been initially recorded as liabilities but are expected
to become income over time or through the operations of the business.

Illustrative problem:

On February 15, 2016 Matapang entered into a contract with Makisig to

maintain the computers of Makisig for two months starting on February 15, 2016 up to
April 15, 2016. On the same date, Makisig paid the total contract amount of PHP40,000
in full. The entries to record and adjust the books are: In the February 29, 2016 entry
above, as of end of February 2016, Matapang has already earned the service revenue
for the first 15 days, thus an adjusting entry is recorded.

GENERAL JOURNAL PAGE 1

POST.
PARTICULARS
DATE REF. DEBIT CREDIT
Journal entry:
1 Feb 15 Cash 40,000
2 Unearned service revenue 40,000
To record receipt of full payment for
the two-month service contract with
3 Makisig
Adjusting entry:
4 Feb 29 Unearned Service Revenue 10,000
5 Service Revenue 10,000
To record service income earned
from Feb 15-29, 2016; P40,000 x (1/2
6 month /2 months)
 4. Accrued Expenses of Accrued Liabilities

These are items of expenses that have been incurred but have not been
recorded and paid.

Illustrative problem:

On February 29, 2016, Matapang received the electric bill for the month of
February amounting to PHP3,800. Matapang will pay this bill on March 2016. The
electric bill represents the cost of electricity used (or incurred) for February. Although
the said bill is still unpaid and thus was not recorded, the matching principle and
accrual basis of accounting dictates that the same should be recorded in February.
Otherwise, your expense will be understated and thus the company will be reporting
an overstated income (or an erroneous income). Needless to say, erroneous
information may lead to wrong decisions. The entry to record the accrual of this
expense is:

Adjusting entry:
GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
1 Feb 29 Utilities Expense 3,800
2 Utilities Payable 3,800
To accrue the cost of electricity
3 incurred for the month of February.
 5. Accrued expenses of accrued liabilities

These are income items that have been earned but have not been recorded
and paid by the customer. In short, these are receivables of the business.

Illustrative problem:

On February 28, 2016, Matapang repaired the computer of Pedro for

PHP15,000. Pedro was on an out-of-town trip so he could not pay Matapang. He told
Matapang that he will pay for their services on March 1, 2016. Matapang has already
earned the PHP15,000 but was not paid as of the end of February 2016. Therefore,
an income should be properly recognized in February 2016 for this transaction. The
entry to record this is: Adjusting entry:
GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
1 Feb 29 Accounts Receivable 15,000
2 Service Income 15,000
To record accrued income for the
services already rendered during the
3 month of February.
 Lesson Prepare an Income Statement
2 and a Balance Sheet

INCOME STATEMENT

This statement is one of the major financial report. Also known as profit and loss
statement or statement of comprehensive income. This statement summarizes the
results of company’s operations for a specific period of time. If the result of operation
is positive, then the business earns net income otherwise, net loss.

Ledger accounts that can be found in the income statement are called Temporary
accounts of Nominal accounts. They are called such because at the end of the
accounting period, balances under these accounts are transferred to the capital
account, thus having only temporary amounts and resulting to zero beginning balances
at the beginning of the following year.(Haddock, Price, & Farina, 2012) Examples of
temporary accounts include revenues, sales, utilities expense, supplies expense,
salaries expense, depreciation expense, interest expense among others.
Depicted in figure 8 below is sample format of an income statement.

The different parts of income statement are:

• The heading or title of report
• Name of the company
• Date or period covered Major parts are:
• Income or revenues - consist of all income received within the period upon
provision of services for service-concern business and sales for
merchandising
 • Expenses – money spent during the conduct of business operations Net
income / net loss – the outcome of business operations.

Figure 8 – Income statement of a Service type Business

BALANCE SHEET

Also known as the statement of financial position. This statement summarizes the total
balances of assets, liabilities and owner’s equity. In general, it provides the financial
condition of the business on a specific date.

The balance sheet is composed of Permanent accounts. Permanent in nature

because their balances remain intact and will be forwarded from one period to another.

Contra asset are those asset account presented under the asset portion of the
balance sheet such as Allowance for Bad debts and Accumulated depreciation.
Depicted in figure 9 below is sample format of a balance sheet of a service type
business presented in as an account format with contra asset account.

The different parts of balance sheet are:

• The heading or title of report
• Name of the company
• Date or period covered

Major parts are:

• Assets (Current and Non-current)
Current Assets – Assets that can be realized (collected, sold, used up) one
year after year-end date. Examples include Cash, Accounts Receivable,
Merchandise Inventory, Prepaid Expense, etc.
Current Assets are arranged based on which asset can be realized first
(liquidity). Current assets and current liabilities are also called short term
assets and shot term liabilities.

Noncurrent Assets – Assets that cannot be realized (collected, sold, used up)
one year after yearend date. Examples include Property, Plant and Equipment
(equipment, furniture, building, land), Long Term investments, Intangible
Assets etc.

• Liabilities (Current and Non-current)

Current Liabilities – Liabilities that fall due (paid, recognized as revenue)

within one year after year end date. Examples include Notes Payable, Accounts
Payable, Accrued Expenses (example: Utilities Payable), Unearned Income,
etc.

Noncurrent Liabilities – Liabilities that do not fall due (paid, recognized as

revenue) within one year after year-end date. Examples include Loans Payable,
Mortgage Payable, etc.
Noncurrent assets and noncurrent liabilities are also called long term
assets and long-term liabilities.

Owner’s Equity or Capital

Capital is an item of balance sheet wherein the capital or interest of the owner
of the business is listed. Initial withdrawal of capital will be recorded in a drawing
account of the owner and will be reflected as a deduction to the capital balance.
Figure 9 – Balance Sheet of a Service type Business
(Account Form)
 Lesson Identify where there is a Profit
3 or Loss for a Business

Profitability has always been the overall goal of the business. It is of great
achievement in a successful implementation of strategic, operating and other plans.

In identifying the profit or loss of a business, the business will record every detail
of all business transactions and translate it into financial report. An income statement
is a financial report that reveals the total revenue or income, total expenses incurred
during the conduct of the business and, most of all the net profit or net loss as a result
of business operations over a specified period of time.

Below is the basic equation of income statement of a service-concern business:

Net Income/Loss = Service Income - Total Expenses

Lesson Interpret Financial Statements (Balance Sheet, Income

Statement, Cash Flow Projections and Summary of
4 Sales and Cash Receipts)
INTERPRETATION OF FINANCIAL STATEMENTS

Financial statements will reveal the outcome of the business operations. A

financial analyst is like a medical doctor who will conduct diagnosis by reading the
financial report and render interpretations on it which will be used as the basis of a
sound economic decision making.

As previously defined, balance sheet reflects the financial position and condition of
the business. The financial position refers to the assets of the business which will be
financed by the liability and owner’s equity. On the other hand, financial condition
refers to the situation wherein assets, liability and owner’s equity are used to maximize
income. Also, assets, liability and owner’s equity may encounter growth or decline in
value.

There are many available financing tools to be used in analyzing and interpreting
financial statements. It depends on the purpose. Most of these tools are able to
evaluate and interpret asset growth of the business, profitability, liquidity and solvency.
In general, it will provide a bird’s eye view of the overall health of the business.

Depicted in figure 14 below is a matrix of financial interpretation with formula

and explanation.

Accounts Formula Interpretation

Measure the ability of the company to generate income from the use
Profitability ratios of its assets and invested capital as well as control its cost
It measures the percentage of profit
Operating income Operating Income Net earned from each peso of
ratio Sales
(Horngren [Link]. 2013).
Measures the peso value of income
Return on asset Net Income generated by employing the
(ROA) Ave. Assets company’s assets.
 Measures the return (net income)
Return on equity Net Income generated by the owner’s capital
(ROE) Ave. Equity invested in the business

Financial Health
Refers to the company’s capacity to pay their short- and long-term
Ratios obligations as they become due.

Indicates the percentage of the

company’s assets that are financed
Total Debt Total by debt. A high debt to asset ratio
Debt ratio
Assets implies a high level of debt.

Indicates the percentage of the

company’s assets that are financed
Total Equity Total by capital. A high equity to asset
Equity ratio
Assets ratio implies a high level of capital.

Indicates the company’s reliance to

debt or liability as a source of
financing relative to equity. A high
ratio suggests a high level of debt
Debt to equity Total Debt that may result in high interest
ratio Equity expense.

Measure the company’s ability to pay debts that are coming due (short
Liquidity term debt).

Solvency Refers to the company’s capacity to pay their long-term liabilities.

It seeks to measure whether there

are sufficient current assets to pay
Current Assets for current liabilities. Creditors
Current ratio
Current Liabilities normally prefer a current ratio of 2.

It does not consider all the current

assets, only those that are easier to
Quick Assets
Quick ratio liquidate such as cash and
Current Liabilities accounts receivable that are
referred to as quick assets.
Figure 14 - Matrix of financial interpretation with formula and explanation.
ACTIVITY TIME: Now, let us complete the accounting cycle by recording financial
transactions and applying the concept of bookkeeping which will generate financial
statements. Upon completing this activity, you will be able to know the financial
position, profitability and the condition of the business thru financial statement analysis
and interpretation.
 Activity 1 : Identifying and recording a business transaction using the General
Journal

Below is an example of business transactions of a service type business. You

are task to record the said transactions in the general journal by means of journal entry
applying the rules of debit and credit.

Depicted in figure 11 is the standard chart of accounts of Alpha Laundry

System.

Figure 11 – Chart of Accounts

Let us begin!

Mr. Denver Ambrose is a retired public school teacher. He started his laundry
business in June 2018. He used all of his savings to start a “coin-operated laundry”
business. He named it Alpha Laundry Systems (ALS). The following are business
transactions for the month of June 2018, the first month of business operation:

1. June 1, 2018 - Mr. A invested P 200,000 cash in his newly opened Alpha Laundry
System business.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
 DATE PARTICULARS REF. DEBIT CREDIT
1 June 1
2
To record the initial Capital investment
3 of Mr. A.

2. June 2, 2018 - Mr. A hired his former classmate Doree Dy to be the laundry operator
of ALS for a fixed monthly salary of P10,000. The operator will be paid every
quencina.

3. On June 5, 2018 – Alpha Laundry Systems purchased laundry equipment for cash,
P150,000.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
4 June 5
5
To record the acquisition of Laundry
6 equipment

4. On June 6, 2018 – Alpha Laundry Systems paid cash in advance for the 1 year
insurance coverage of laundry equipment for the whole year amounting to P6,000.
Monthly insurance expense will be recognized for each month end report.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
 DATE PARTICULARS REF. DEBIT CREDIT
7 June 6
8
To record the prepaid Insurance for the
9 Laundry equipment

5. On June 7, 2018 – Alpha Laundry Systems bought supplies for laundry amounting
to P10,000. The supplies bought are laundry consumables such detergent powder,
soap bar and fabric softener. Monthly inventory will be conducted to determine
unused supplies and will be recognized for each month end report.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
10 June 7
11
To record the acquisition of laundry
12 consumables

6. On June 15, 2018 – Alpha Laundry Systems paid P4,750 cash for salary of laundry
operator.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
13 June 15
14
To record the payment of Laundry
15 operator’s salary

7. On June 16, 2018 – Alpha Laundry Systems received P25,000 cash for laundry
services rendered to MZ. Hotel.
Your Journal Entry:
GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
16 June 16
17
To record the payment received from MZ
18 Hotel.

8. On June 17, 2018 – Alpha Laundry Systems rendered service to Argon Hotel
amounting to P45,000. Argon promised to pay on June 20 of the same year.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
19 June 17
20
To record the service rendered to Argon
21 Hotel

9. On June 18, 2018, Alpha Laundry Systems purchase office supplies from Ku
Enterprises amounting to P2,000 on account. ALS will pay it on June 25 of the
same year.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
22 June 18
23
 To record the acquisition of Office
Supplies on account from Ku
24 Enterprises

10. On June 20, 2018, Alpha Laundry Systems collected payment of Argon Hotel.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
25 June 20
26
To record the full payment from Argon
27 Hotel

11. On June 25, 2018, Alpha Laundry Systems paid in full the amount owed to Ku
Enterprises.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
28 June 25
29
To record the full payment of account to
30 Ku Enterprises

12. On June 27, 2018, Alpha Laundry Systems paid electric bill for the month
amounting to P1,000 in cash. The payment is charged to Utility expense account.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
 31 June 27
32
To record the payment Electricity for the
33 month

13. On June 30, 2018, Alpha Laundry Systems paid a month’s transportation expense
amounting to P 1,300.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
34 June 30
35
To record the payment of transportation
36 for the month.

14. On June 30, 2018, Alpha Laundry Systems paid P5,000 cash for salary of laundry
operator.

Your Journal Entry:

GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
37 June 30
38
To record the payment Laundry
39 operator’s salary.

15. On June 30, 2018, Alpha Laundry Systems paid P7,500 cash for the month’s rent
of laundry space.
Your Journal Entry:
GENERAL JOURNAL PAGE 1

POST.
DATE PARTICULARS REF. DEBIT CREDIT
40 June 30
41
To record the payment of rent for Laundry
42 space.

Completing the monthly General Journal record will give the owner of the
business a financial record of all business transactions that transpired during the
month. It will reflect the inflows and outflows of cash, provisions of services which
generate income.