Accounting Principles Book of Accounts and Accounting Cycle Part 1 PDF

ACCOUNTING PRINCIPLES BOOK OF ACCOUNTS AND ACCOUNTING CYCLE PART 1 NOVEMBER, 2024 NOEL GARCIA TUBICE INSTRUCTOR  SPECIFIC LEARNING OBJECTIVES At the end of this lesson, the learners will be able to: identify the uses of the two books of accounts (journal and led...

ACCOUNTING PRINCIPLES BOOK OF ACCOUNTS AND ACCOUNTING CYCLE PART 1 NOVEMBER, 2024 NOEL GARCIA TUBICE INSTRUCTOR  SPECIFIC LEARNING OBJECTIVES At the end of this lesson, the learners will be able to: identify the uses of the two books of accounts (journal and ledger) to record business transactions. explain the use of general and special journals to record business transactions. discuss the use of general and subsidiary ledgers to record business transactions. understand business transactions and their analysis as applied to the accounting cycle of a business.  TWO MAJOR TYPES OF BOOKS OF ACCOUNTS: 1. THE JOURNAL Businesses initially record transactions and events in chronological order (the order in which they occur). The JOURNAL is referred to as the book of original entry. For each transaction the journal shows the debit and credit effects on specific accounts. The journal makes several significant contributions to the recording process: It discloses in one place the complete effects of a transaction. It provides a chronological record of transactions. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.  TWO TYPES OF JOURNALS: A. GENERAL JOURNAL The general journal is the most basic journal. Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns.  TWO TYPES OF JOURNALS: A. GENERAL JOURNAL To illustrate the recording of transactions in the general journal, let us use the following transactions as an example: September 1, 2015 Mr. Ben Mabait invested PHP500,000 in a restaurant business by opening an account with SuperBank. September 5, 2015 purchased kitchen appliances for his business amounting to PHP100,000 by issuing a check. September 6, 2015 started his operations a made a sales for that day amounting to PHP20,000. September 7, 2015, Mr. Mabait purchased a motorcycle costing PHP80,000. He pays PHP30,000 cash and agrees to pay the remaining PHP50,000 on account (to be paid later). TWO TYPES OF JOURNALS: A. GENERAL JOURNAL ENTRY SIMPLE ENTRY COMPOUND  TWO TYPES OF JOURNALS: B. SPECIAL JOURNAL The following are the commonly used special journals: Cash Receipts Journal – used to record all cash that has been received Cash Disbursements Journal – used to record all transactions involving cash payments Sales Journal (Sales on Account Journal) – used to record all sales on credit (on account) Purchase Journal (Purchase on Account Journal) – used to record all purchases of inventory on credit (or on account)  TWO TYPES OF JOURNALS: B.1 CASH RECEIPTS JOURNAL The source document for this journal is the Official Receipts or Cash Receipts issued by the business.  TWO TYPES OF JOURNALS: B.2 CASH DISBURSEMENTS JOURNAL Debit The source documents used to update this journal are the check voucher or cash voucher, cash receipts or official receipts from suppliers or vendors.  TWO TYPES OF JOURNALS: B.3 SALES JOURNAL The source document for this journal is the Charge Invoice issued by the business.  TWO TYPES OF JOURNALS: B.4 PURCHASE JOURNAL The source document for this journal is the charge invoice from the supplier or vendor.  TWO MAJOR TYPES OF BOOKS OF ACCOUNTS: 2. THE LEDGER The ledger refers to the accounting book in which the accounts and their related amounts as recorded in the journal are posted periodically. The ledger is also called the ‘book of final entry’ because all the balances in the ledger are used in the preparation of financial statements. This is also referred to as the T-Account because the basic form of a ledger is like the letter ‘T’.  TWO TYPES OF LEDGERS: A. GENERAL LEDGER The general ledger (commonly referred by accounting professionals as GL) is a grouping of all accounts used in the preparation of financial statements. The GL is a controlling account because it summarizes all the activities that have taken place as recorded in its subsidiary ledger.  TWO TYPES OF LEDGERS: B. SUBSIDIARY LEDGER A subsidiary ledger is a group of like accounts that contains the independent data of a specific general ledger. A subsidiary ledger is created or maintained if individualized data is needed for a specific general ledger account. An example of a subsidiary ledger is the individual record of various payables to suppliers. The total amount of these subsidiary ledgers should equal the balance in the Accounts Payable general ledger.  PRACTICE EXERCISE Identify what special journal that is applicable for the following transactions: 1. Collected PHP10,000 from a customer in payment of his account. 2. Bought 100 pieces of mugs to be sold in the store amounting to PHP1,500 on account. 3. Sold five pieces of mugs to X, PHP320 cash. 4. Sold two pieces of mugs to Y, PHP112 cash 5. Purchased office supplies for cash, PHP500. 6. Paid PHP20,000 monthly rental. 7. Paid salary of staff, PHP15,000 8. Sold 100 pieces of mugs to Unicup, Inc., PHP5,600 on account. 9. Sold 500 pieces of mugs to Bugsmore Corp. for PHP15,300 payable one month after delivery. 10. Purchase on account 1,000 pieces of mugs for PHP12,400  THE ACCOUNTING CYCLE The accounting cycle is a continuous process of accumulating, summarizing and reporting financial information. The steps include:  STEP 1: TRANSACTIONS AND/OR EVENTS Identification and measurement of external and internal transactions. At this stage, the documents used by the business are analyzed whether it has financial impact. Recall the rule (1) that only financial transactions are recorded and (2) that the amount can be measured. These two conditions must exist in order that a particular transaction is recorded. As defined, financial transactions are those activities that change the value of an asset, liability or an equity. Examples of financial transactions Examples of non-financial transactions: Receipt of cash from a client as advance hiring and termination of employees payment to repair a computer. Payment of electric bill recognition from the government as most outstanding business death of owner  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Through the use of specialized journals and the general journal, transactions and events are entered into the accounting records. These are called the books of original entry. Debits and Credits are an integral part of the journalization process. In accounting, debits or credits are abbreviated as DR and CR respectively. RULES ON DEBITS AND CREDITS The name of the account to be debited is always listed first. The debited account is listed on the first line with the amount in the left side of the register. The credited account is listed on the second line and is usually indented. The credited amount is recorded on the right side of the register. The total amount of debit should always equal the total amount of credit.  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Required: Prepare the journal entry for the following transactions of Matapang Computer Repairs. February 14, 2016 – Pedro Matapang, a computer technician decided to open his computer repair shop, naming it Matapang Computer Repairs. He decided to invest PHP200,000 in this business and deposited the amount with Nation Bank. page 1 JOURNAL ENTRY  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Required: Prepare the journal entry for the following transactions of Matapang Computer Repairs. February 15, 2016 - Pedro purchased one computer unit from XY Computer Store to be used for the business. He issued check number 001 amounting to PHP25,000. page 1 JOURNAL ENTRY  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Required: Prepare the journal entry for the following transactions of Matapang Computer Repairs. February 16, 2016 - Pedro hired Juana Magaling, an experienced secretary. JOURNAL ENTRY No entry. This is not a financial transaction.  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Required: Prepare the journal entry for the following transactions of Matapang Computer Repairs. February 17, 2016 – Repaired the computer of Jean and collected PHP10,000. page 1 JOURNAL ENTRY  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Required: Prepare the journal entry for the following transactions of Matapang Computer Repairs. February 18, 2016 – Repaired Mike’s computer. However, Mike will pay PHP15,000 on March 18, 2016. page 1 JOURNAL ENTRY  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Required: Prepare the journal entry for the following transactions of Matapang Computer Repairs. February 19, 2016 – Pedro purchased Office Supplies from MM Merchandise amounting to PHP5,000 on account. Pedro will pay this on March 30, 2016. page 1 JOURNAL ENTRY  STEP 2: PREPARATION OF JOURNAL ENTRIES (JOURNALIZING) Required: Prepare the journal entry for the following transactions of Matapang Computer Repairs. February 25, 2016 – Paid the salary of Juana amounting to PHP4,000. page 1 JOURNAL ENTRY Prepare the journal entries to record the following independent transactions (ignore giving explanations after every entry). 1. On Jan 4, 2016, received PHP20,000 from a customer in payment for services rendered. 2. Payment to X Supplier amounting to PHP4,000 for office supplies purchased on Jan 3, 2016. 3. Maria invested PHP60,000 on Jan 18, 2016 to start a barbershop in Iligan City. Prepare the journal entries to record the following independent transactions (ignore giving explanations after every entry). 4. On Jan 3, 2016 paid PHP10,000 rental amount for the month of Jan 2016. 5. On Jan 15, 2016, Peter Pawn withdrew PHP30,000 from his business to pay for the tuition of his son. 6. Collected PHP20,000 of the accounts receivable from Malakas Company on Jan 17, 2016. Prepare the journal entries to record the following independent transactions (ignore giving explanations after every entry). 7. Paid the salary of the office secretary amounting to PHP15,000 on Jan 18, 2016. 8. Purchased office equipment worth PHP20,000 by paying 40% down payment and the balance on account. 9. Paid PHP2,000 of the accounts payable on Jan 28, 2016. 10. Rendered services to clients on Jan 18, 2016 amounting to PHP15,600.  STEP 3 – POSTING TO THE LEDGER The summary and individual transactions from the journals (general or special journals) are then posted to the ledgers (general and subsidiary ledgers). Nothing should ever get posted to the ledgers without first being entered in a journal.  CHART OF ACCOUNTS A chart of accounts is a listing of the accounts used by businesses in their financial records. The chart of accounts is the foundation of the financial statements.  CHART OF ACCOUNTS The following are the steps in the preparation of a basic chart of accounts: 1. Create three columns. 2. Prepare the assets first, then liabilities, then owner’s equity, then income and expenses. 3. List all assets, liabilities, owner’s equity, income and expenses account in the first column. 4. On the second column, choose an account code (discretion of the business). 5. On the third column, write the description for each account on when to use it.  EXAMPLE OF CHART OF ACCOUNTS ASSETS Account Account Code *may vary Description Cash 1000 Use for actual cash transactions Accounts Receivable 1100 Use for customers who will pay in the future Inventory 1200 Use for items held for sale Prepaid Expenses 1300 Use for expenses paid in advance Supplies 1400 Use for items to be used in the future Office Equipment 1500 Use for equipment that are used in the office Store Equipment 1600 Use for equipment that are used in the store Land 1700 Use for land used in operations  EXAMPLE OF CHART OF ACCOUNTS LIABILITIES Account Account Code *may vary Description Accounts Payable 2000 Use for the debts of the business Notes Payable 2100 Use for promissory notes issued by the business Salaries Payable 2200 Use for salaries to be paid in the future  EXAMPLE OF CHART OF ACCOUNTS OWNER’S EQUITY Account Account Code *may vary Description Owner’s, Capital 3000 Use for the debts of the business Owner’s, Withdrawal 3100 Use for promissory notes issued by the business INCOME Account Account Code *may vary Description Service Revenue 4000 Use for earnings EXPENSE Account Account Code *may vary Description Salaries Expense 5000 Use for salaries incurred, regardless of payment Utilities Expense 5100 Use for electricity and water expenses incurred  STEP 3 – PROCEDURES IN POSTING TO THE LEDGER 1. Locate the corresponding account title in the journal. (A) 2. Transfer to the ledger the following information from the journal: (B, C & D) Date Explanation Amount Debit accounts from the journal are posted on the debit side of the ledger and credit accounts are posted on the credit side of the ledger.  STEP 3 – PROCEDURES IN POSTING TO THE LEDGER (B) (A) (F) (C) (D) (E)  STEP 3 – PROCEDURES IN POSTING TO THE LEDGER 3. Place the page number of the journal in which the information was taken to the reference column of the ledger. (E) 4. Place in the reference column of the journal the account number of the ledger in which the information was posted. (F) Inserting the account number in the journal reference column serves two purposes: a. It serves as a cross-reference when it is desired to trace the amount from one record to another. b. Writing the account number in the journal indicates that posting is completed.  STEP 3 – PROCEDURES IN POSTING TO THE LEDGER (B) (A) (F) (C) (D) (E) RECALL OF JOURNALIZED TRANSACTIONS OF MATAPANG COMPUTER REPAIRS  STEP 3 – POSTING TO THE LEDGER Required: Post the journalized transactions of Matapang Computer Repairs to the general ledger. Use three-column ledger. GENERAL LEDGER GJ1 GJ1 GJ1 GJ1  STEP 3 – POSTING TO THE LEDGER Required: Post the journalized transactions of Matapang Computer Repairs to the general ledger. Use three-column ledger. GJ1 GENERAL LEDGER GJ1 GJ1  STEP 3 – POSTING TO THE LEDGER Required: Post the journalized transactions of Matapang Computer Repairs to the general ledger. Use three-column ledger. GENERAL LEDGER GJ1 GJ1 GJ1  STEP 3 – POSTING TO THE LEDGER Required: Post the journalized transactions of Matapang Computer Repairs to the general ledger. Use three-column ledger. GENERAL LEDGER GJ1 GJ1  STEP 4 – UNADJUSTED TRIAL BALANCE At the end of an accounting period the working trial balance is prepared. This involves copying each account name and account balance to a worksheet. In the preparation of the unadjusted trial balance, the accounts and its balances in all the general ledgers at the end of the reporting date are forwarded to the appropriate column. The unadjusted trial balance for the transactions in our example from Step 3 is shown below: STEP 4 – UNADJUSTED TRIAL BALANCE THANK YOU FOR LISTENING!