Bookkeeping: Recording Transactions and Ledger Entries

Module Overview

• This module provides instruction on recording business transactions, preparing journal entries, and posting to the general ledger.
• It also covers making adjustments and preparing trial balance reports to track business operations.
• This module is divided into two lessons: performing key bookkeeping tasks and identifying profit or loss.
• After completing this module, one should understand bookkeeping basics, apply bookkeeping skills, and determine business profitability.

Key Bookkeeping Terms

• Bookkeeping is the systematic and chronological process of recording business transactions, following set procedures and principles in order of occurrence.
• A bookkeeper records, maintains, and updates business records using account titles and books of accounts.
• Books of Accounts consist of the journal and ledger.
• The journal is the book of original entry.
• The ledger is the book of final entry.
• The general journal is a basic journal with columns for date, account titles, explanations, folio, and debit/credit entries.
• The general ledger is a group of all accounts, found in the chart of accounts, reflected in the trial balance as a summary of financial activities.

Subsidiary Ledgers

• It is a group of accounts directly associated with the general ledger.
• These records maintain individual accounts for customers and vendors when cash is not the medium of exchange.
• Accounts receivable ledgers record all credit sales and amounts invoiced to customers, including payments.
• Accounts payable ledgers contain details for all invoices from suppliers and consolidate summary-level information in the general ledger.

Debits and Credits

• Debits and credits are essential for accurate recording and sound decision-making in journalizing business transactions.
• Debit is abbreviated as DR, while Credit is abbreviated as CR.
• Steps to determine account balances:
  • Add all debit side to generate total debit.
  • Add all credit side to generate total credit.
  • Subtract total debit to the total credit.
  • Determine the balance of each account.
• A "T" account, divided into debit (left) and credit (right) sides, is a method for posting journal entries to the ledger.
• The debit side shows value received, while the credit side shows value parted with

The Five Major Accounts

• Assets are resources with economic value owned or controlled by an entity with the expectation of providing a future benefit.
• Liabilities are the obligations, usually a sum of money, a person or company owes to another.
• Owner's equity represents the residual ownership in a firm or asset after subtracting all liabilities.
• Revenue increases in economic benefits that a company get from it's business activities.
• Expenses are the costs a company incurs to generate revenue.

Normal Account Balances

• Assets, expenses, and drawing accounts normally have debit balances.
• Liabilities, owner's equity, and revenue accounts normally have credit balances.

Adjusting Entries

• Adjusting entries update financial data already recorded and capture all financial events within an accounting cycle.
• Basic sources of adjusting entries include depreciation expense, deferred expenses/prepaid expenses, deferred/unearned income, accrued expenses/liabilities, and accrued income/assets.
• Depreciation allocates an asset's cost to expense over its useful life; land is not subject to depreciation.
• The straight-line method is:
  • Annual Depreciation = (Acquisition Cost – Salvage Value) / Useful Life
• Deferred/prepaid expenses are initially recorded as assets but become expenses over time.
• Deferred/unearned income is initially recorded as liabilities but becomes income over time.
• Accrued expenses/liabilities is related to recorded incurred expenses that hav enot yet been paid.
• Accrued income/assets are income items that have been earned but not yet recorded or paid by the customer.

Trial Balance

• A trial balance lists ledger accounts with closed or final balances, arranged by assets, liabilities, capital, revenue, and expense.
• Debit and credit columns must be equal in total amount.
• It is created that is the first report prior to financial statement preparation.

Net Income Computation

• Net Income/Loss = Service Income - Total Expenses