Journalizing, posting and preparation of trial balance PDF

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1 RULES OF DEBIT AND CREDIT The account or accounts to be debited and credited can be determined easily by applying the rules of debit and credit. Generally, debit signifies increase in assets, expenses and drawing whereas, credit signifies increase in liabilities, capital and revenues. On the other hand, debit signifies decrease in liabilities, capital and revenues, whereas credit signifies decrease in assets, expenses, and drawing Stated differently, Debit signifies:

Credit signifies:

Increase in Assets Decrease in Liabilities Decrease in Capital Increase in Drawing Decrease in Revenue Increase in Expense

Decrease in Assets Increase in Liabilities Increase in Capital Decrease in Drawing Increase in Revenue Decrease in Expense

Illustrations: Atty. Herbert Hernane decided to start his practice of law by establishing his own law office. Following are the transactions of the law firm during June, its first month of operation: The accounts affected and whether it is to be debited or credited are as follows: June

1 – Cash of P 200,000 was received from Atty. Hernane, the owner as his initial investment in his law firm. Debit Cash Credit Herbert Hernane, Capital The receipt of cash by the company will increase its asset cash, therefore, cash is to be debited. Herbert Hernane, Capital is to be credited to record the increase in the capital account of the business.

June

2 – Purchased office supplies for cash, P 5,000. Debit Office Supplies Credit Cash The purchase of office supplies will increase the asset office supplies, so it is to be debited. Cash is to be credited because the payment will cause cash to decrease.

June 3 – Purchased office equipment worth P 50,000. Paid P 10,000 cash as down payment and signed a promissory note for the balance. Debit Office Equipment Credit Cash and Notes Payable The asset office equipment will increase so it has to be debited. The office equipment was not paid in full so the company will have a liability for the unpaid balance. Since the liability is supported by a promissory note, the other account to be credited is Notes Payable. June

4 – Issued check in payment for the promissory note issued, P 40,000. Debit Notes Payable Credit Cash The payment of a liability will cause liability to decrease. So the liability account, Notes Payable is to be debited. Every time the company pay or disburse cash, the account Cash is credited to reflect the decrease in cash.

June

5 – Received P 50,000 cash from clients for services rendered for cash. Debit Cash Credit Professional Fees The receipt of cash by the business is always recorded by debiting the account cash, whereas, the earning of revenue is always recorded by crediting the revenue account.

June

6 – Billed a client for services rendered on account, P 30,000. Debit Accounts Receivable Credit Professional Fees The company will have a receivable from the client to whom service were rendered on account. Therefore, Accounts Receivable is to be debited. Again, for a service business, revenue is considered earned or realized once services have been rendered whether for cash or on account. That’s why the revenue account Professional Fees is to be credited.

June

7 – Received payment from the client to whom services were previously rendered on account. Debit Cash Credit Accounts Receivable

June

The collection of a receivable will decrease the receivable account, so it is to be credited. 8 – The owner withdrew P 10,000 cash from the business for personal use.

2 Debit Herbert Hernane, Drawing Credit Cash Cash taken by the owner for personal use is to be charged owner’s drawing account. June

9 – Paid office rent for the month, P 8,000. Debit Rent Expense Credit Cash The payment for rental will increase the balance of the Rent Expense account, so it is to be debited.

The application of the rules of debit and credit are summarized as follows: Business transactions Debit Credit (a) The owner invests cash in the business Cash Owner’s Capital (b) The owner withdrew cash from the business for Owner’s Drawing Cash personal use. (c) Purchased office supplies for cash Office Supplies Cash (d) Purchased office supplies on account Office Supplies Accounts Payable (e) Return some of the office supplies previously Accounts Payable Office Supplies purchased on account. (f) Purchased equipment on account. Equipment Accounts Payable (g) Issued check in payment for the equipment Accounts Payable Cash purchased on account. (h) Received cash from customers for services Cash Service Revenue rendered. (i) Rendered services to customers on account. Accounts Receivable Service Revenue (j) Received payment from customers on account. Cash Accounts Receivable (k) Paid employees salaries Salaries Expense Cash NOTE: For easier understanding of the debit and credit entries, additional hints are given as follows: 1. If there are only two accounts affected in the transaction, one is to be debited and the other one is to be credited. The two accounts cannot be both debited or credited. 2. Apply the concept of value received and value given away. Some of the transactions of Herbert Hernane, Law Office are journalized as follows: GENERAL JOURNAL

Date

Particulars

2014 June

1 Cash

Post Ref.

Page 1

Debit 2

0

0

0

Credit 0

0

-

Herbert Hernane, Capital Cash investment by owner.

2

2 Office Supplies

5

0

0

0

0

Cash Notes Payable Purchased office equipment. Paid a down payment and issued a promissory note for the balance.

5

0

0

0

0

0

0

0

-

5

0

0

0

-

0 0

0 0

0 0

0 0

-

-

Cash Purchased office supplies for cash. 3 Office Equipment

0

1 4

The first and second entries are simple journal entries because there is only one account debited and only one account credited. The third entry is a compound journal entry because there are more than two accounts involved in the entry. A compound journal entry is one where in there are two or more accounts debited or two or more accounts credited. The amount of the debits should always equal the amount of the credits. Learning Exercises: A. Analyze the following transactions as to the effects on the accounting elements and state whether the corresponding amount is to be debited or credited. The account titles to be used are:

3 Cash Accounts Receivable Furniture and Fixtures Equipment Accounts Payable L. Evangelista, Drawing

Service Income Salaries and Wages Supplies Expense Rent Expense Taxes and Licenses L. Evangelista, Capital

1. L. Evangelista invests the following in a janitorial services business: Cash . . . . . . . . . . . . . . . . . . . . . . P100,000 Furniture and Fixtures . . . . . . . 20,000 2. Business permits amounting to P4,000 are paid. 3. She buys counter tables for P5,000 on account. 4. The annual rental for office space being occupied is paid P48,000 5. Supplies such as detergent powders, fabric softener, cleansers, and cleaning supplies are bought in cash, P5,000. 6. The business bills clients for services rendered, P40,000. 7. L. Evangelista collects P22,000 from some of the clients billed in (6) above. 8. A client billed in (6) was over-billed for P800. The corresponding adjustment is made. 9. L. Evangelista withdraws P10,000 cash from the business. B. Prepare the journal entries to record the following transactions in a 2-column journal. 2014 Oct 1 - J. Magcusi invests P50,000 in a shoe and bag repair shop business. 2 - He pays for mayor’s permit and other licenses amounting to P2,000. 3 - He buys books of accounts, invoices, and other forms for P500 cash. 4 - He buys tools needed for repairing shoes and bags P8,000 cash. He buys cutting machine from GIR ON Merchandise for P25,000 paying P10,000 with the balance on 5 account. Estimated useful life of the machine is five (5) years. 8 - Services rendered on cash basis amount to P42,000. 9 - He pays salaries and wages for P30,000. 10 - He pays electricity bills for P7,000. 11 - Services rendered on cash basis amount to P45,000. 15 - He collects P20,000 from customers billed on Oct. 8. 15 - J. Magcusi withdraws cash of P10,000 from the business. 15 - Water bills amounting to P8,000 are paid Use the following account titles: Cash Accounts Receivable Washing Machines Accounts Payable J. Magcusi, Capital J. Magcusi, Personal

Service Income Salaries and Wages Electricity and Water Taxes and Licenses Office Supplies Repair Tools Supplies

THE LEDGER A group of accounts is called a ledger. The ledger provides a summary of transactions for an accounting period. Each account has an individual record in the general ledger wherein the effects of business transactions are summarized. The general ledger contains the entire set of accounts used by a business which are arranged in the following order: Assets, Liabilities, Capital, Revenue and Expense accounts. If journal is called the book of original entry, ledger is called the book of final entry. POSTING Posting is the process of transferring the entries from the journal to the accounts in the ledger. If an account is debited in the journal, it will also posted on the debit side of the account in the ledger. A credit entry in the journal is also posted in the credit side of the account in the account in the ledger. Steps in Posting: 1. Locate in the ledger the debit and credit account in the journal entry. 2. Enter the date of the transaction, and in the posting reference column of the ledger, the page of the journal from the entry originates. 3. Record the debit and credit amounts in their respective accounts as they appear in the journal. 4. Enter in the posting reference column of the journal the account number to which the amount was posted.

4 The first journal entry of Herbert Hernane, Law Office is posted below to illustrate how journal entries are posted from the journal to the accounts in the ledger.

CASH Date June 1

Items

P/R 1

Debit 200,000

Date

Items

HERBERT HERNANE, CAPITAL Date

Items

P/R

Debit

Date June 1

Items

Account No. 101 P/R Credit

Account No. 301 P/R Credit 1 200,000

DETERMINING THE ACCOUNT BALANCE After posting the journal entries to the ledger, the amounts of the debit and credit columns of the accounts are totaled and the difference between the amount of debit and credit totals is determined. This process is called pencil footing. The account balance is the difference between the total debits and the total credits of an account. If the total of the debits is greater than the credits, the account will have a debit balance. Example: Debit Total P 20,000 Credit Total 15,000 Account Balance 5,000 debit The debit balance is written on the debit side of the account. If the credit total is greater than the debit total, the account will have credit balance. That is, Credit Total P 20,000 Debit Total 15,000 Account Balance 5,000 credit The credit balance is written on the credit side of the account. NORMAL BALANCES OF ACCOUNTS The normal balances of accounts are: Assets debit Liabilities credit Capital credit Drawing debit Revenue credit Expenses debit The account balance must be in its normal balance. If the account balance computed is not in its normal balance, it may indicate that an error has occurred in journalizing and / or posting transactions or an unusual situation exists. For example, a credit balance in the office equipment account means an error has been committed because office equipment should have a normal balance of debit. The rules of debit and credit and the normal balances of accounts: Account Assets Liabilities Capital Drawing Revenue Expense Exercises 1.1 True or False. 1. 2. 3. 4. 5. 6.

Position Taken For Increases Decreases Debit Credit Credit Debit Credit Debit Debit Credit Credit Debit Debit Credit

Normal Balance Debit Credit Credit Debit Credit Debit

Cash investment by the owner increases business cash and increases owner’s equity. Billings to customers for services rendered increase asset (Accounts Receivable) and increase revenue (Service Income). Withdrawal of cash by the owner increases the asset cash and reduces owner’s equity. The left side of an account is debit while the right side is credit. Because of their relative positions in the equation, assets and liabilities, normally, are debits while owner’s equity is a credit. In as much as net income is an addition to owner’s equity, increases in revenue and expenses, in effect, increase owner’s equity.

5 Exercises 1.2 For each of the following accounts, state in column A the classification of the account (Whether the account is an asset, liability, capital, revenue, or expense), in column B if debit or credit for increase in the account and in column C if debit or credit for decrease, and in column D, the normal balance of the account.

Example: Utilities Expense

Column A Classification Expense

Column B Increase Debit

Column C Decrease Credit

Column D Normal Balance Debit

1. Accounts Payable 2. Accounts Receivable 3. Cash 4. Carl Calma, Capital 5. Carl Calma, Drawing 6. Commission Income 7. Equipment 8. Interest Receivable 9. Insurance Expense 10. Notes Payable 11. Notes Receivable 12. Prepaid Rent 13. Prepaid Insurance 14. Salaries Expense 15. Service Revenue

PREPARING THE TRIAL BALANCE A Trial Balance is a summary listing of the account titles and the balance of each account. It is prepared to test the equality of the debit and credit balances of the accounts in the ledger. However, even if the trial balance is equal, it does not provide a complete proof of the accuracy of the accounting records because there are errors which do not affect the equality of the trial balance. But then, if the trial balance does not balance it is an indication that error has been committed. STEPS IN PREPARING A TRIAL BALANCE; 1. Write the heading of the trial balance as follows:

2. 3.

4. 5.

Name of the business or proprietor Trial Balance Date List the accounts with corresponding balances. Accounts should be arranged according to financial statement appearance. Write down the account balance on either the debit or credit column of the trial balance. If the account balance is debit, it is written on the debit column. If the account balance is credit, it is placed on the credit column of the trial balance. Note: The account balance is taken from the ledger. Add the debit and credit columns of the trial balance. Normally, the debit and credit totals are equal. Double Rule or draw a double line under the totals of both columns.

CHART OF ACCOUNTS A chart of accounts is a list of all the accounts of the business and corresponding account numbers. Asset accounts are usually numbered starting with 1, liabilities starting with 2, capital starting with 3, revenue starting with 4 and expenses starting with 5. This list of account titles are prepared beforehand to guide bookkeepers and accountants as to what specific account titles are to be used in recording transactions. Example: Vic Castro opened a portrait studio on December 1, 2013. Following were the company’s transactions during the month: Dec. 1 Began business by depositing P300,000 in the business checking account. 1 Paid two month’s rent in advance for the studio, P40,000. 2 Bought photography equipment on account, P100,000.

5 8

-

Purchased office equipment for cash, P50,000. Purchased photography supplies for cash, P30,000.

6 15 16 21 22 28 29 30 30

-

Received cash for portraits, P70,000. Billed customers for portraits, P25,000. Paid for one-half of the photography equipment purchased on Dec.2, P50,00. Paid utility bill for the month of December, P15,000. Received payment from customers billed on Dec. 16, P12,000. Vic Castro withdrew cash for personal use, P20,000. Received cash from customers for portraits, P22,000. Paid wages of employees, P23,000. The payroll voucher showed the following information: Gross Pay Less: Deductions Withholding tax SSS Contribution PhilHealth Contribution Net Pay

P

P

25,000

P

2,000 23,000

1200 600 200

Following is the chart of accounts of VC Portrait: VC PORTRAIT Chart of Accounts Acct. No. ASSETS Cash Accounts Receivable Photography Supplies Prepaid Rent Photography Equipment Accumulated Depreciation-Photography Equipment Office Equipment Accumulated Depreciation-Office Equipment

101 102 103 104 105 106 107 108

LIABILITIES Accounts Payable Wages Payable Utilities Payable Withholding Taxes Payable SSS Contributions Payable PhilHealth Contributions Payable

201 202 203 204 205 206

CAPITAL Vic Castro, Capital Vic Castro, Drawing

301 302 REVENUE

Portrait Revenue Interest Income

401 402

EXPENSES Wages Expense Utilities Expense Supplies Expense Depreciation Expense-Photography Equipment Depreciation Expense-Office Equipment Rent Expense SSS Contributions Expense PhilHealth Contributions Expense Miscellaneous Expense

501 502 503 504 505 506 507 508 509

GENERAL JOURNAL

Date 2014 Dec

1

Particulars

Post Ref.

Cash Vic Castro, Capital

101 301

Page 1

Debit 3

0

0

0

Credit 0

0

3

0

0

0

0

0

-

Cash investment by the...