Introduction to Financial Statement Analysis

(COM 5024)

Lesson 3
The Accounting Process – Recording

Asst. Prof. Franklin U. Prieto

 The Accounting Process
•The accounting process is composed of a series of steps performed to be
able to accumulate information and make the financial statements.
•The accounting process is based on the double entry bookkeeping system
which follows the rules of debit and credit.
Why is it called the double entry bookkeeping system?
•A series of steps called the “accounting cycle”
Why is it called the cycle?
The steps in the accounting cycle: Recording Phase
1. Analyzing the transactions through the source documents (documentation)
2. Recording the transactions in the journal (journalizing)
3. Recording the transactions in the ledger (posting)
4. Preparation of the unadjusted trial balance
5. Preparation of the worksheet
6. Preparation of the financial statements
7. Journalizing and posting the adjusting journal entries (AJE)
8. Journalizing and posting the closing journal entries (CJE)
9. Ruling nominal accounts and balancing real accounts
10. Preparation of the post-closing trial balance
11. Journalizing and posting the reversing journal entries (RJE)

Summarizing Phase
 The T-Account and Rules of Debit and Credit
What is it called a T-Account?
•T-account is an informal device used to analyze the transactions to
determine how the accounts are affected. It is called the T-account because
it resembles like a capital letter T. It has two sides the left side called the
debit side and the right side called the credit side.
Account Title

Debit Credit
(Left Side) (Right Side)
The rules of debit and credit:
For every debit there is a corresponding credit
Every transaction affects at least two accounts.
The total of the debits and the total of the credits must be
equal.
Whether the account is increased or decreased depends on the
nature of the account. There are accounts that are increased
on the debit side and decreased on the credit side. There are
accounts that are increased on the credit side and decreased
on the debit side.
The account is debited when the amount is put on the left side
and credited when the amount is put on the right side.
 ACCOUNT
BALANCE

NORMAL
BALANCE

CONTRA-
ACCOUNTS
Real Accounts What is this?

Nominal Accounts
Transactions commonly performed by a business:
Investment transaction
Acquisition of assets (for cash or on account)
Services rendered / sales (for cash or on account)
Payment of expenses
Payment of liabilities
Collection of receivables
Withdrawal of the owner / return of investment
 Journalizing
What is journalizing?
•The process of recording transactions in the journal. Journal entries are
arranged in chronological order.
What is a journal?
•A loose-leaf page or bound book where business transactions are first
recorded. It is sometimes referred to as the book of original entry.
There are two kinds of Journal
General Journal
- The general journal is designed to record the day-to-day
transactions of the company.
Special Journals
- The special journal is designed to record recurring
transactions of the same nature. It is commonly used by a
merchandising business.
Examples of Special Journals:
• Cash Receipt Journal – used to record all types of cash receipts
• Cash Disbursement Journal – used to record all types of cash payment
• Sales Journal – used to record sales on account
• Purchases Journal – used to record purchases on account
1. Columns of the general journal
a. Date
b. Description / Particulars / Explanation
c. Posting Reference (PR) / Folio
d. Debit Amount
e. Credit Amount
2. Steps in journalizing
a. Record the date
b. Record the debit account title in the
Particulars column
c. Record the debit amount
d. Record the credit account title in the
Particulars column
e. Record the credit amount
f. Record the Particulars
Journalizing
Juan Dela Cruz established a sole proprietorship known as JDC Taxi Company. The
following were the transactions of the company during the first month of operation.
•Juan Dela Cruz deposited P100,000 in the bank in the name of JDC Taxi Company.
•Purchased land as future garage site for P75,000 cash.
•Purchased P8,500 of gasoline and oil from Petrol Corner on credit.
•Paid partially P4,000 to Petrol Corner.
•JDC Taxi earned fares of P45,000 in cash for the month.
•Paid for the following business expenses:
Wages (P11,250) rent (P8,500) utilities (P1,500) miscellaneous expenses (P750)
•At the end of the month it is determined that the remaining supplies on hand P2,500.
•The company rendered taxi service to a client on account for P25,000.
•Collected cash from customer on account P15,000.
•At the end of the month, Juan Dela Cruz withdrew from the business P10,000 in cash for
personal use.
JOURNALIZING TRANSACTIONS
1. Juan Dela Cruz deposited P100,000 in the bank in the name of JDC Taxi Company.
Cash (increase) 100,000 DR
J. Dela Cruz, capital (increase) 100,000 CR
Sep 1 Cash 100,000
J. Dela Cruz, Capital 100,000
To record the initial investment.
2. Purchased land as future garage site for P75,000 cash.
Land (increase) 75,000 DR
Cash (decrease) 75,000 CR
2 Land 75,000
Cash 75,000
To record the purchase of land as future garage site.
3. Purchased P8,500 of gasoline and oils from Petrol Corner on credit.
Supplies (increase) 8,500 DR
Accounts payable (increase) 8,500 CR
3 Supplies 8,500
Accounts payable 8,500
To record the purchase of supplies.
4. Paid partially to Petro Corner P4,000
Cash (decrease) 4,000 CR
Accounts payable (decrease) 4,000 DR
4 Accounts Payable 4,000
Cash 4,000
To record partial payment of accounts.
5. JDC Taxi earned fares of P45,000 in cash for the month.
Cash (increase) 45,000 DR
Taxi revenue (increase) 45,000 CR
5 Cash 45,000
Taxi revenue 45,000
To record fares earned for the month.
6. Paid for the following business expenses: Wages, P11,250; Rent, P8,500; Utilities, P1,500; Misc. P750
Cash (decrease) 22,000 CR Utilities Expense (increase) 1,500 DR
Wages Expense (increase) 11,250 DR Misc. Expense (increase) 750 DR
Rent Expense (increase) 8,500 DR
6 Wages Expense 11,250
Rent Expense 8,500
Utilities Expense 1,500
Misc. Expense 750
Cash 22,000
To record payment for various expenses.
7. At the end of the month it is determined that the remaining supplies on hand is P2,500
Supplies (decrease) 6,000 CR
Supplies expense (increase) 6,000 DR
7 Supplies expense 6,000
Supplies 6,000
To record supplies used (8,500 – 2,500)
8. The company rendered taxi service to a client on account for P25,000.
Accounts receivable (increase) 25,000 DR
Taxi revenue (increase) 25,000 CR
8 Accounts receivable 25,000
Taxi revenue 25,000
To record services rendered on account.
9. Collected cash from customer on account P15,000.
Cash (increase) 15,000 DR
Accounts receivable (decrease) 15,000 CR
9 Cash 15,000
Accounts receivable 15,000
To record collection of accounts.
10. At the end of the month, Juan Dela Cruz withdrew from the business P10,000 in cash for
personal use.
Cash (decrease) 10,000 CR
J. Dela Cruz, Drawing (increase) 10,000 DR

10 J. Dela Cruz, Drawing 10,000

Cash 10,000
To record owner’s withdrawal of cash.
Practice Exercises
Required:
A.Analyze the following transactions based on the expanded accounting equation. (Oral)
B.Journalize the transactions. Use the general journal and follow the formalities in journalizing.
 
Exercise 1
2021
August 1 Nigel Castro started a business called, The Gift Repair Shop by investing P10,000 cash.
3 Bought shop supplies for P500 cash.
5 Bought shop equipment on account from Hyundai P5,000.
7 Paid Hyundai P3,600 cash.
10 Rendered services for cash P1,000.
13 Rendered services on account to PNP P2,000.
15 Collected from PNP ½ of the account.
20 Paid rent for the month P1,500.
23 The owner withdrew P300 cash for personal use.
30 Paid tax and license for P500.
Exercise 2
2021
Sept. 1 Ivy Santos invested P5,000 cash in Flawless Beauty Shop.
3 Bought manicure sets and other toiletries for shop use P1,500 cash.
5 Bought display cases, chairs and tables and standing mirror on account from Real
Beauty Supplies, P5,000.
6 Paid taxes and license for P300 cash.
12 Rendered services for cash P1,800.
15 Paid rent for the month P200 cash.
18 Rendered services on account to Access worth P2,000.
21 Bought additional dryers on account from Bree’s Beauty Shop for P2,000.
23 Paid the Philippine Inquirer P400 for advertisement.
Exercise 3
2021
October 2 Migo Cruz opened a TV Repair Shop by Investing P2,000 in the business.
4 Purchased shop supplies for cash P480.
6 Purchased additional supplies P250 and shop equipment P750 on credit
from Electronic Supplies Inc.
8 Repaired the TV set of Karl Reyes and collected P150 cash.
10 Paid electronic Supplies Inc P500 partial settlement of account due.
14 Repaired the TV set of John Rex on credit P180.
18 Paid the monthly utility bill P190.
22 Received P800 from various walk-in customers for repair services.
24 Withdrew P500 from business for personal use.
~ end of the lecture ~