Chapter 6

Chapter 6
The Journal
The journal is a chronological record of events or business transactions showing all the effects of each
transaction in terms 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.
A journal entry should contain the following:
1. Date. Write the month on the first transaction unless there is a change in month for the succeeding
transactions or a new page is used.
2. 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 one line before
proceeding to the next transaction.
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.
4. Debit. Under this column, write the debit amount for each debit account.
5.Credit. Under this column, write the credit amount for each credit account.
Presume that May Daya established MaDayaConsultancy Firm with an initial investment of P 800,000 on
August 1, 2017. The journal entry is shown below.
General Journal Page Number
Date Account Titles and Explanation P.R. Debit Credit
2017
Aug. 1 Cash
Daya, Capital
Initial Investment
The Simple and Compound Entry

When only two accounts are affected, we call this a simple entry where there is only one debit account
and one credit account. The previous example where the owner, May Daya, 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.
Journalizing the Transactions
Journalizing is the process of recording transaction in the journal after it has been recognized and
measured.
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 in maintained.
Rules for Debit and Credit
You debit to show: You credit to show:
1. Increase in assets 1. Decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease on owner's equity 3. Increase in owner's equity
-Owner's withdrawal - Initial investment
-Expenses -Additional investment
- Revenue/income
The Analysis of Transaction
Following are the steps involved to analyze transactions:
1. From the business document, determine the kind of transaction or exchange made.
2. Analyze the transaction to determine the accounts affected. They can either affect the assets,
liabilities , owner's equity, revenue, or expenses accounts.
3. Determine the effect of the transaction on the accounts affected. The transactions can either increase
or decrease the accounts.
4. Apply the rules of debit and credit to identify whetherbthe accounts affected should be debited or
credited to show the corresponding increase or decrease.
Illustrative Problem
The following are transactions for MaDaya Consultancy Firm for the month of August. They will be
recorded using the double entry system. To analyze each transaction, the following shall be used to
show the effect on the accounts as follows: A (for Asset) , L (for Liability) or OE (Owner's Equity). The
effects on owner's equity is subclassified as follows: OE:R (Revenue) and OE: E (Expenses)
Initial Investment
Aug. 1 May Daya is a masters degree holder in business administration. She worked for ten years in the
corporate world holding different managerial positions. Finally, May decided to quit her job and
establish a consultancy firm. She invests P 800,00 in this initial endeavor.
Analysis: Assets increased. Owner's Equity increased.
Rules: Debit increase in assets. Credit increases in owner's equity.
Entry: Increase in assets is recorded by a debit to cash. Increase in owner's equity is recorded by a credit
to Daya, Capital.
Dr Cr
Cash (A) 800,000
Daya, Capital (OE) 800,000
Initial Investment
Issuance of Note for Cash
Aug. 2 May Daya issued a promissory note for a P 500,000 loan payable after one year.
Analysis Assets increased. Liabilities increased.
Rules Debit increases in assets. Credit increases in liabilities.

Entry Increase in assets is recorded by a debit to cash. Increase in liabilities is recorded by a credit to
notes payable.
Dr Cr
Cash (A) 500,000
Notes Payable (L) 500,000
Borrowed money issuing a promissory note
Acquisition of Office Furniture for Cash
Aug. 3 Acquired office furniture to be used for the office. P 150,000 cash.
Analysis An asset increased. Another asset decreased .
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to office furniture.
Decrease in assets is recorded by a credit to cash.
Dr Cr
Furniture and Fixture (A) 150,000
Cash (A) 150,000
Purchased office furniture for cash
Acquisition of Office Equipment, Paying Down Payment, and the Balance on Account
Aug.5 Acquired office equipment from Eastern Marketing P 50,000 paying P 10,000 and the balance at
the end of the month. Note: A compound entry is needed this transaction.
Analysis Assets increased. Assets decreased. Liabilities increased.
Rules Debit increases in assets. Credit decreases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to office equipment. Decrease in assets is recirded byba
credit to cash. Increase in liabilities is recorded by a credit to Accounts Payable.
Dr Cr
Office Equipment (A) 50,000
Cash (A) 10,000
Accounts Payable (L) 40,000
Bought office equipment paying cash and the balance on account.
Events not Affecting the Accounting Equation (no journal entry)
Aug. 7 Hired office assistant with P 8,000 monthly salary. The office assistant started work on the
following day.
There is no entry necessary at this point as the hiring of the office assistant has no effect on the assets,
liabities, and owner's equity.
Aug. 7 Called Ace Supplies and ordered office supplies worth P 7,000.
There is no entry necessary at point as the ordering of the office supplies has no effect on assets,
liabilities, and owner's equity. No delivery of the supplies has been made thereby no liability arises.
Payment of Insurance Premiums
Aug. 7 Paid Agno Insurance Co. P 9,000 for one year insurance premium.
Analysis An asset increased. Another asset decreased.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to Prepaid Insurance. Decrease in assets is recirded by a
credit to cash.
Dr Cr
Prepaid Insurance (A)
Cash (A)
Paid one year insurance premium

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Chapter 6

A journal entry should contain the following:

General Journal Page Number

Date Account Titles and Explanation P.R. Debit Credit

The Simple and Compound Entry

Journalizing the Transactions

Rules for Debit and Credit

You debit to show: You credit to show:

1. Increase in assets 1. Decrease in assets

2. Decrease in liabilities 2. Increase in liabilities

3. Decrease on owner's equity 3. Increase in owner's equity

-Owner's withdrawal - Initial investment

-Expenses -Additional investment

The Analysis of Transaction

Following are the steps involved to analyze transactions:

Analysis: Assets increased. Owner's Equity increased.

Rules: Debit increase in assets. Credit increases in owner's equity.

Cash (A) 800,000

Daya, Capital (OE) 800,000

Issuance of Note for Cash

Analysis Assets increased. Liabilities increased.

Rules Debit increases in assets. Credit increases in liabilities.

Cash (A) 500,000

Notes Payable (L) 500,000

Borrowed money issuing a promissory note

Acquisition of Office Furniture for Cash

Analysis An asset increased. Another asset decreased .

Rules Debit increases in assets. Credit decreases in assets.

Entry Increase in assets is recorded by a debit to office furniture.

Decrease in assets is recorded by a credit to cash.

Furniture and Fixture (A) 150,000

Cash (A) 150,000

Purchased office furniture for cash

Analysis Assets increased. Assets decreased. Liabilities increased.

Office Equipment (A) 50,000

Cash (A) 10,000

Accounts Payable (L) 40,000

Bought office equipment paying cash and the balance on account.

Events not Affecting the Accounting Equation (no journal entry)

Payment of Insurance Premiums

Analysis An asset increased. Another asset decreased.

Rules Debit increases in assets. Credit decreases in assets.

Prepaid Insurance (A)

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