CHAPTER 3

RECORDING BUSINESS TRANSACTION

Accounting Cycle
The Accounting Cycle refers to a series of sequential steps or procedures performed to accomplish the accounting process. The steps
of Accounting Process are as follows:
Step 1. Identification of Events to be Recorded
Step 2. Transactions are Recorded in the Journal
Step 3. Journal Entries are posted to the Ledger
Step 4. Preparation of a Trial Balance
Step 5. Preparation of the Worksheet including Adjusting Entries
Step 6. Preparation of the Financial Statements
Step 7. Adjusting Journal Entries are Journalized and Posted
Step 8. Closing Journal Entries are Journalized and Posted
Step 9. Preparation of a Post-closing Trial Balance
Step 10. Reversing Journal Entries are Journalized and Posted
Transaction analysis – is the first step of the accounting cycle. The basic steps in analyzing transactions are:
✓ Identify the transaction from source documents (e.g. sales invoice, cash register tapes, official receipts, bank statements…. etc.)
✓ Indicate the accounts, either assets, liabilities, equity, income or expenses, affected by the transaction
✓ Ascertain whether each account is increased or decreased by the transaction
✓ Using the rules of debit and credit, determine whether to debit or credit the account to record its increase or decrease

Transactions are journalized – is the second step of the accounting cycle.

✓ Recording involves the writing down of business transaction in a systematic manner and in order of their occurrence in the
Journal.
✓ A Journal is a chronological record of entity’s transaction. It is also called the book of original entry.
✓ Journalizing is the process of recording transaction. The simplest journal is the General Journal.
Other kind of journal is the Special Journal.
A General Journal have the following standard contents:
• Date column
• Particulars
• Posting Reference (PR)
• Debit column and Credit column
Shown below is the formation of a simple journal entry:
Page no.
Year Particulars PR Debit Credit
Month Day Debit item 1,750.35
Credit item 1,750.35
Explanation of the Nature of transaction

In journalizing, the rules of double-entry system are observed in each transaction. The value received is debited while the value parted
is credited. The sum of the debits for every transaction equals the sum of the credits; and the equality of the accounting equation is
always maintained.

Opening Entry – is the first entry made in the general journal such as the recording of the initial investment of the owner who for the
first time engage into business.
Other set of books used by the business is a ledger which has two kinds: the General Ledger and the Subsidiary ledger.
A General ledger is the “reference book” of accounting system and is used to classify and summarize transactions.
A ledger is a “group of accounts” called the book of final entry. It is in this book where transaction that were recorded in the journal are
transferred for final recording.
The accounts in the general ledger are classified into two general groups:
• Balance Sheet or Permanent Accounts (Assets, Liabilities and Owner’s Equity), sometimes called Real Account.
• Income Statement or Temporary Accounts (Income and Expenses), sometimes called Nominal Account.
Each account has its own record in the ledger. Every account in the ledger maintains the basic format of the T-Account.
The left-hand side is called a debit while the right-hand side is called a credit. Each side has the column for the: Date, Particulars, Folio
or Journal Reference, and the Money column. A ledger organizes information by account.
Shown below is the format of a T-Account in a general ledger:

ACCOUNT TITLE Page No.

Year Particulars F Debit Year Particulars F Credit
Month Day Month Day

Chart of Accounts is a list of all the accounts and their account numbers in the ledger. It shows account titles which are arranged in the
financial statement order, that is, Asset, Liabilities, Owner’s Equity, Income and Expenses.
Presented below is the chart of accounts of Royal Blue Services:

Royal Blue Services

Chart of Accounts

ASSETS INCOME
Page Account Page Account No. No. No. No.
1
111 Cash 19 441 Service Income 2
112 Accounts Receivable
113 Supplies EXPENSES
114 Prepaid Rent 20 551 Salaries Expense
56 115116 Prepaid InsuranceService Vehicle 2122 552553 Supplies
ExpenseRent Expense
117 Accumulated Depreciation 23 554 Insurance Expense
118 Office Equipment 24 555 Utilities Expense
119 Accumulated Depreciation 25 556 Depreciation Expense-
LIABILITIES 26 557 Depreciation ExpenseService
Vehicle -
221 Notes Payable 27 558 Miscellaneous Expense
222 Accounts Payable 28 559 Interest Expense
223 Salaries Payable
224 Utilities Payable
225 Interest Payable
226 Unearned Service Fee

OWNER’S EQUITY
331 Royal, Capital
332 Royal, Drawing
333 Revenue and Expense Summary
Posting -is the third step of the
Accounting Cycle.

Posting is the process of transferring entries from the journal to the ledger. The transfer of entries from the journal to the ledger is
actually the sorting process or “classifying aspect of accounting” as each value is place according to its kind, class or nature.

In posting, debits in the journal are posted as debits in the ledger, and credits in the journal as credits in the ledger. The following are
the steps in posting:

Transfer the date of the transaction from the journal to the ledger.
Transfer the page number from the journal to the journal references (J.R.) column of the ledger.
Post the debit figure from the journal as a debit figure in the ledger and the credit figure from the journal as a credit figure in the ledger.
Enter the account number in the posting reference column of the journal once the figure has been posted to the ledger.
 Footing is the process of adding each of the two amount columns of an account or item in the general ledger and finding their balances
thereof. If the account is a credit balance, meaning credit total is greater than debit total, the difference is placed in the credit column.
If the account is debit balance, meaning debit total is greater than the credit total, the difference is placed in the debit column.

After footing, those accounts with a “ debit” or “credit” balances are said to be accounts with “open balances” or referred to as “open
accounts”.

Trial Balance Preparation - is the fourth step of the Accounting Process

After footing, accounts in the ledger with open balances are listed down with their respective balances, in a summary report called Trial
Balance. This is done to check the mathematical accuracy in posting and footing and to verify the equality of debits and credit in the
ledger at the end of each accounting period . But the equality of debit and credit does not signify the absence of any error at all.

The following is the procedures in the preparation of a trial Balance:

List the account titles in the General Ledger with “open balances ” following the sequences of filing the accounts in the ledger.
Obtain the account balance of each account from the ledger and enter the debit balances in the debit column and the credit balances in
the credit column.
Add the debit and credit columns.
Compare the totals and “double rule” if total debits equal total credits.

A trial balance is of two forms: “Trial Balance of Balances” and “Trial Balance of Totals”. Shown below is the trial balance of Royal
Blue Services.

Royal Blue Services Trial Balance

May 31, 2014

DEBIT CREDIT
Cash P 44,400
Accounts Receivable 24,000
Supplies 36,000
Prepaid Rent 16,000
Prepaid Insurance 28,800
Service Vehicle 840,000
Office Equipment 120,000
Notes Payable P 420,000
Accounts Payable 106,000
Utilities Payable 2,800
Unearned Service Revenue 20,000
Royal, Capital 500,000
Royal, Drawings 28,000
Service Income 124,800
Salaries Expense 27,600
Utilities Expense 8,800 _________
Total P 1,173,600 P 1,173,600
======== =======

Errors in the Trial Balance

The trial balance is said to be a control device that help detect and minimize accounting errors. The inequality of the totals of the debit
and credit indicates that an error and/ or omissions have been committed . There are cases too where errors and omissions are committed
yet the trial balance total are equal.

The following cases would result to the inequality of trial balance :

Errors in preparing the trial balance

Incorrect addition of the debit and/or credit column
Incorrect recording of the account amount on the trial balance * transposition
* slide
A debit balance was recorded on the trial balance as credit ; or a credit balance was recorded on the trial balance as debit. 4. Omission
of the entire amount on the trial balance
Errors in determining the account balances:
Incorrect computation of balance (addition and/or subtraction process)
A balance was entered in the wrong balance column

Error in posting a transaction to the ledger

Omission of a debit or credit posting
A debit entry was posted as a credit or vice versa.
Incorrect amount was posted to the account.

The following are errors and omissions committed that will still result to equality of the totals of debit and credit of trial balance:
Failure to record transaction in the journal
Both debit and credit of journal entry may not have been posted in the ledger.
Recording the same transaction more than once.
Recording an entry but with the same erroneous debit and credit amounts
Correct journal entry amount may have been posted to a wrong account.
Inappropriate use of account title in the journal that was carried to posting in the ledger.
The following is the suggested approach to locate an error in the trial balance:

Check the addition of the debit and credit column of the trial balance;
Check whether the corresponding amount of each of the listed account in the trial balance are posted in their proper normal balance
column. If still out of balance then,
Determine the difference between the debit and credit totals
If the amount of difference is 1, 10, 100 or 1,000, it might be an error in addition;
If the amount of difference is 9 or a multiple of 9, a transposition error was committed, meaning the orders of figures written are reversed.
For example 36 was written as 63;
If the amount of difference is divisible by 2 it might be an error in listing the account balance. A debit amount was listed in the credit
column of the trial balance and vice versa;
If the amount if difference is divisible by 9 ( can be divided by 9) it indicates a slide or misplacement of decimal point. For example, P
2,500 was incorrectly written as P 250

(Note : step a to d could not be applied if there are two or more errors being committed simultaneously.)
Compare the accounts and amounts in the trial balance with that in the ledger. Be sure no account is omitted and amounts are correctly
carried to its appropriate column.
Re compute the balance of each ledger account.
Trace all postings from the journal to the ledger accounts.