CHAPTER 3: RECORDING OF THE BUSINESS

TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022

Step 2: Transactions are Recorded in

the Journal
STEP 1: TRANSACTION ANALYSIS
- To record the economic impact of
4 Basic Steps for Transaction Analysis the transactions on the firm in a
1. Identify the transaction from source journal, which is a form that
documents. facilitates transfer to the account.
2. Indicate the accounts—assets, Step 3: Journal Entries are Posted in
liabilities, equity, income or the Ledgers
expenses—affected by the - To transfer the information from the
transaction. journal to the ledger for
3. Ascertain whether each account is classification.
increased or decreased by the
transactions. At the end of the Accounting Period
4. Using the rules of debit and credit, Step 4: Preparation of Trial Balance
determine whether to debit and credit - To provide listings to verify the
the account to record its increase and equality of debits and credits in the
decrease. ledger.
Step 5: Preparation of the Worksheet
including the Adjusting Entries
SOURCE DOCUMENTS - To aid in preparation of financial
This identifies and describes statements.
transactions and events entering the Step 6: Preparation of the Financial
accounting process. This written evidence Statements
contains about the nature and the - To provide useful information to the
amounts of transactions. decision-makers.
Some of the common source Step 7: Adjusting Journal Entries are
documents are: sales invoices, cash Journalized and Posted
register tapes, official receipts, bank - To record accruals, expiration of
register slips, bank statements, checks, deferrals, estimation and other
purchase orders, timecards and events from the worksheets.
statements of account. Step 8: Closing Journal Entries are
Journalized and Posted
- To close temporary accounts and
ACCOUNTING CYCLE: SEQUENTIAL transfer profit to owner’s equity.
STEPS AND AIMS Step 9: Preparation of Post-Closing
Trial Balance
During the Accounting Period
- To check the equality of debits and
Step 1: Identification of Events to be
credits after the closing entries.
Recorded
- To gather information about the
transactions or events generally
through the source documents.

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CHAPTER 3: RECORDING OF THE BUSINESS
TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022

At the end of the Accounting Period 2. Account Titles and Explanation -

Step 10: Reversing Journal Entries the account to be debited are
are Journalized and Posted written on the extreme left of the
- To simplify the recording of certain first line while the account to be
regular transactions in the next credited is entered slightly indented
accounting period. on the next line. A brief description
of the transaction is usually made
STEP 1: THE GENERAL JOURNAL on the line below the credit.
➔Shows all the effects of the Generally, skip the line after each
transaction in terms of debits and entry.
credits. 3. P.R. (posting reference) - is used
STEP 2: POSTING when the entries are posted, that is,
➔Transferring the amounts from the until the amounts are transferred to
general journal to appropriate the related ledger accounts.
accounts in the ledger. 4. Debit - the debit amount for each
STEP 3: THE LEDGER account is posted in this column.
➔Group of accounts. Used to classify 5. Credit - the credit amount for each
and summarize transactions and to account is posted in this column.
prepare data for basic financial
statements. Simple and Compound Entry
STEP 4: TRIAL BALANCE 1. Simple Entry - only two accounts
➔Listing all ledger accounts, in order, are affected.
with their respective debit or credit 2. Compound Entry - three or more
balances. accounts are required.

THE JOURNAL
STEP 2: TRANSACTIONS ARE
➔Chronological record of entity’s JOURNALIZED
transactions.
➔“book of original entry” Journalizing is the process of
➔Shows all the effects of a business recording a transaction. To understand the
transaction in terms of debit & nature of the affected accounts, the letter
credit. A, L or OE is inserted after each entry. OE
➔The general journal is the simplest is can be classified into OE:I and OE:E
journal.
Standard Format of General Journal Rules of Double-Entry System
1. Date - year and month are not 1. Two or more accounts are affected by
written every entry unless the year each transaction.
or month changes or new page is 2. The sum of the debits equals the sum
needed. of the credits.

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CHAPTER 3: RECORDING OF THE BUSINESS
TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022

3. Equality of accounting equations is

always maintained. STEP 3: POSTING
Posting means transferring the
THE LEDGER amounts from the journal to the
appropriate accounts in the ledger.
Ledger is the grouping of the entity’s
account. A general ledger is the 4 Basic Steps for Posting
“reference book” of an accounting system 1. Transfer the date of transaction from
and is used to classify and summarize the journal to the ledger.
transactions, and to prepare data for basic 2. Transfer the page number from the
financial statements. journal to the journal reference (J.R.)
column of the ledger.
Classification of Accounts in General 3. Post the debit figure from the journal
Ledger as the debit figure in the ledger and
1. Balance Sheet or permanent credit figure from the journal to the
accounts (assets, liabilities, equity) credit figure in the ledger.
2. Income statement or 4. Enter the account number in the
temporary/nominal accounts posting reference column of the
(income and expenses). At the end journal once the figure has been
of the period these are transferred posted to the ledger.
to the permanent owner’s equity
account.
LEDGER ACCOUNTS AFTER
POSTING
CHART OF ACCOUNTS
At the end of an accounting period,
Chart of accounts is a listing of all the the debit or credit balance of each account
accounts and their account number in the must be determined to enable us to come
ledger. The chart is arranged in financial up with a trial balance.
statement order (1: assets; 2: liabilities; 3: ❖Each account balance must be
owner’s equity; 4: income; 5: expenses). determined by footing (adding) all
The account should be numbered in a the debits and credits.
flexible manner to permit indexing and ❖If the sum of an account’s debits is
cross-referencing. greater than the sum of the
The accountants should refer to the account’s credit, that account has a
chart of accounts in analyzing transactions debit balance.
to identify the applicable account to be ❖If the sum of credits is greater that
increased or decreased. account has a credit balance.

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CHAPTER 3: RECORDING OF THE BUSINESS
TRANSACTIONS
Basic Financial Accounting and Reporting (Lecture Notes)
BS Accountancy 1 - 1 | Prof. Isolde Rodil-Sustrina | Sem 1 2022

3. Error in preparing trial balance

STEP 4: TRIAL BALANCE - one of the columns of trial
Trial balance is a list of all accounts balance was incorrectly added.
with their respective debits or credits - the amount of an account
balances. Prepared to verify the equality of balance was incorrectly
debits and credits in the ledger. recorded in trial balance.
Trial balance minimizes accounting - a debit balance was recorded
errors. When the totals are equal, the trial on the trial balance as a credit
balance is in balance. This provides or vice versa, or a balance was
accuracy but does not signify absence of omitted entirely.
errors.

Procedure in the Preparation of Trial

Balance
1. List the account titles in numerical
order.
2. Obtain the account balances of each
account from the ledger and enter the
debit balances to the debit column
and credit balances to credit column.
3. Add the debit and credit columns.
4. Compare the totals.

LOCATING ERRORS
Errors When There is an Inequality of
Totals
1. Error in posting a transaction to
the ledger.
- an erroneous amount was
posted to the account.
- a debit entry was posted as
credit and vice versa.
- a debit or credit posting was
omitted.
2. Error in determining the account
balances
- a balance was incorrectly
computed
- a balance is entered in the
wrong balance column.