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Chapter 4

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  1. 1. The Double-Entry System of Recording Transactions<br /><ul><li>Recording transactions in accounting is based on the double-entry system. The transaction has a dual effect which means that every transaction affects at least two accounts. For every debit there is a corresponding credit. The total amount of the accounts debited must equal the total amount of the accounts credited.</li></ul>The Accounting Cycle<br /><ul><li>The Life of a business is divided into accounting periods of equal length. A standard sequence of accounting procedures is repeated for each period. These uniform procedures done to accomplish the accounting process are referred to as the accounting cycle.</li></li></ul><li>Identifying and analyzing the events table recorded <br /> This is the process of identifying and analyzing the transactions to be recorded through the business documents. Business documents are forms containing evidence to support a business transactions. <br />2. Recording transactions in the journal<br />This is known as journalizing. It is the process of recording the transaction in the first book of account known as the journal. <br />3. Posting journal entries to the ledger <br /> This is known as posting. It is the process of transferring the information found in the journal into the book of final entry known as the ledger. This summarizes the increase or decrease of individual accounts.<br />
  2. 2. 4. Preparing the trial balance <br /> The trial balance is a list of accounts found in the ledger together with the account’s balance or total.<br />5. Preparing the worksheet and adjusting entries<br />The worksheet is a common tool used by accountants to assemble on a sheet of a paper al the information needed to prepare the financial statements, adjusting entries, closing entries, and the post-closing trial balance. <br />6. Preparing the financial statements<br />A balance sheet , income statement, statement of changes in equity, and cash flow statement are prepared to provide useful information to parties interested in the financial information of the business.<br />
  3. 3. 7. Journalizing and posting of adjusting journal entries<br />Adjusting entries are prepared at the end of the accounting period to update the accounts for internal transactions because they affect more than one accounting period.<br />8. Journalizing and posting of closing journal entries<br />Closing entries are prepared at the end of the accounting period to update the owner’s capital account.<br />9. Preparing the post closing trial balance <br />After the closing entries have been posted, the post closing trial balance is prepared from the general ledger accounts.<br />10. Journalizing and posting of reversing journal entries<br />Reversing entries are prepared to simplify the accounting process. The adjusting entries are simply reversed on the first day of the accounting period.<br />
  4. 4. The Analysis of Transaction<br />Following are the steps involved to analyze transactions:<br />From the business document, determine the kind of transaction or exchange made.<br />Analyze the transaction to determine the accounts affected. They can either affect the assets, liabilities, owner’s equity, revenue or expenses accounts.<br />Determine the effect of the transaction on the accounts affected.The transaction can either increase or decrease the accounts.<br />Apply the rules of debit and credit to identify whether the accounts affected should be debited or credited to show the corresponding increase or decrease.<br />The Journal<br />The Journal is a chronological record of events or business transaction showing all the effects of each transaction in terms<br />
  5. 5. of debits and credits. Because transactions are initially recorded in the journal, it is called the book of original entry. The simplest journal is the general journal.<br />A Journal entry should contain the following:<br />Date. Write a month on the first transaction unless there is a change in month for the succeeding transactions or a new page is used.<br />Account Titles and Explanation. Write the debit account at the extreme left of the first line while the credit account is indented half-inch on the next line. The explanation describing the transaction is written on the extreme left of the next line below the credit. Remember to skip on line before proceeding to the next transaction.<br />
  6. 6. 3. P.R. (Posting Reference) Write the corresponding account number here once the entry is posted. Meanwhile, it is left blank until the posting has been done.<br />4. Debit. Under this column, write the debit amount for each debit account.<br />5. Credit. Under this column, write the credit amount for each debit account.<br />The Simple and Compound Entry<br />When only two accounts are affected, we call this a simple <br /> entry where there is only one debit account and one credit account. The previous example where the owner NikoOng, made an initial investment is a simple entry. In some cases, a transaction would require the use of three or more accounts in which case the entry is called a compound entry.<br />
  7. 7. Journalizing the Transactions <br />Journalizing is the process of recording transaction in the journal after it has been recognized and measured.<br />In journalizing transactions the double entry system is used. In this case, two or more accounts are affected by each transaction. It follows that for every debit, a corresponding credit is made. The total debits should equal total credits for every transaction. IN this way, the equality of the accounting equation is maintained.<br />Rules for debit and credit<br />You debit to show: You credit to show:<br />Increase in assets 1. Decrease in assets<br />Decrease in liabilities 2. Increase in liabilities<br />Decrease in owner’s equity 3. Increase in owner’s equity<br />-Owner’s withdrawal -Initial investment<br />-Expenses -Additional investment<br /> -Revenue/income<br />
  8. 8. Use of T-Accounts<br /> An account is a form of record that summarizes the increases or decreases of any specific accounting value. The simplest form of an account is the T-Account because the accounting equation is represented by a big T. it is an informal tool used to analyze the effect of a transaction in the assets, liabilities, owner’s equity, revenue, and expenses.<br />The three elements of an account are:<br />Account Title<br />Debit<br />Credit<br />
  9. 9. The Ledger<br />The ledger is a group of the accounts used by the company. It is the book of final entry. An account is an accounting device or form of record that summarizes the increases or decreases of any specific accounting value. The accounts in the general ledger are classified into two general groups.<br />Balance sheet or real account (assets, liabilities, and owner’s equity)<br />Income statement or nominal accounts (revenue and expenses)<br />Chart of Accounts<br />Chart of accounts is a list of all account titles used by the company with their corresponding account number. Account titles are arrange in financial statement order. Balanced sheet accounts which include assets, liabilities, and owner’s equity come first. Account titles in the income statement which include revenue and<br />
  10. 10. expenses follow. The accounts are so numbered for purposes of indexing and cross-referencing.<br />The Normal Balance of an Account<br /> The side of an account where increases and recorded is referred to as the normal balance or an account. This can be the left side (debit) or the right side (credit). The reason for this is account increases usually exceed account decreases. The following are the normal balances or accounts:<br />Normal Debit BalanceNormal Credit Balance<br /> Asset Liability<br /> Owner’s Drawing Owner’s Equity<br /> Expense Income<br />
  11. 11. Posting to the Ledger<br />Posting is the process of transferring information from the journal to the ledger. Debits in the journal are correspondingly posted as debits in the ledger, and credits in the journal are likewise posted as credits in the ledger. The steps in posting are as follows:<br />From the journal, copy the date of the transaction to the ledger.<br />Under the journal reference (J.R) column of the ledger, copy the page number of the journal.<br />Under the debit credit ledger, transfer the credit amount from the journal.<br />After posting the amount to the ledger, write the account number in the posting reference (P.R) column of the journal.<br />The Ledger Accounts After Posting<br />The Debit or Credit balance of each account is determined at the end of the accounting period in order to prepare the trial balance. <br />
  12. 12. The debit column and the credit column of each account are added to get the balance of each account. If an account’s total debit exceeds total credit, account has a debit balance. If the total credit exceeds total debit, the account has a credit balance.<br />The Trial Balanced<br /> The trial balanced is the schedule of all balances to prove the equality of the debit and credit it is a listing of all account title with their respective debit or credit balances taken from the ledger. However it does not check or vouch the accuracy of the report.<br />The following are the steps in the preparation of the trial balance:<br />In their proper numerical order, make a listing of all account titles.<br />Get the account balance of each ledger account and write them under their corresponding debit or credit column.<br />
  13. 13. 3. Foot or add the debit and the credit columns of the trial balance.<br />4. Check whether the debit totals and credit totals are equal. They must be equal, otherwise your trial balance has error.<br />