DISCUSSION

BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM

The Books of Accounts

A business maintains two books of accounts, namely:
1. Journal; and
2. Ledger

Journal
The journal, also called the “book of original entries”, is the accounting record
where business transactions are first recorded. Business transactions are
recorded in the journal through journal entries. This recording is called
journalizing.

Types of Journals
Journals can be classified into the following:
1. Special Journal – is used to record transactions of a similar nature. Special
journal simplify the recording process, thus providing an efficient way of
recording and retrieving of information.

Common examples of Special Journals

a. Sales journal – is used to record sales on account.
b. Purchases journal – is used to record purchases of inventory on account.
c. Cash receipts journal – is used to record all transactions involving receipts of
cash.
d. Cash disbursements journal – is used to record all transactions involving
payments of cash. (lahat nang lumalabas na pera dito narerecord)

A business may have other special journals suit its needs. For example,
“Purchase returns journal”, “Sales returns journal”, etc.

2. General Journal – all other transactions that cannot be recorded in the special
journals are recorded in the general journal. Examples of such transactions
include adjusting entries, correcting entries, reversing entries, and the like.
 If a business does not utilize special journals, all its transactions are
recorded in the general journal.

Examples:
a. You sold barbecue to a customer who promised orally to pay the sale price
next week.
 This transaction involves sale on account; therefore, it is recorded in the
sales journal.

b. You sold barbecue to a customer who immediately paid the sale price.
 This transaction involves the receipt of cash; therefore, it is recorded in the
cash receipts journal.

c. You sold barbecue to a customer who promised in writing to pay the sale price
next week.
 This transaction cannot be recorded in the special journals; therefore, it is
recorded in the general journal.

Ledger
The ledger is a systematic compilation of a group of accounts. It is used to
classify the effects of business transactions on the accounts. The ledger is also
called the “book of secondary entries’ or the “book of final entries” because it
is used only after business transactions are first recorded in the journals. The
process of recording in the ledger is called “posting”.

Kinds of Ledgers
Ledgers can be classified into the following:
a. General Ledger – contains all accounts appearing in the trial balance.
b. Subsidiary ledger – provides a breakdown of the balances of controlling
accounts. (more detailed transactions)
*A controlling account (or control account) is one which consists of a group of
accounts with similar nature. The balance of the controlling account is shown in
the general ledger, while the balances of the accounts that comprise the
controlling account are shown in the subsidiary ledger. Not all accounts in the
general ledger though are controlling accounts. Only those whose balances
necessarily need a breakdown are considered controlling accounts.

Example:
You sell barbecue on credit. The balance of credit sales not yet collected is
P100,000. This information is shown in Accounts Receivable, which is a
controlling account in the General Ledger.
However, knowing only the total balance is insufficient. You need a
breakdown of this amount. You need information on which customers owe you
money and the amount each customer owes you. This information is provided
by the Subsidiary Ledgers.
Analyze the illustration below:

General Ledger Subsidiary Ledger

Accounts Receivabe from
Customer A, P20,000

Accounts Receivable, Accounts Receivabe from

P100,000 Customer B, P30,000

Accounts Receivabe from

Customer C, P50,000

● SUMMARY

Books of Accounts Description Function

1. Journal  Book of  Journalizing
a. General Journal original (Initial
b. Special Journals entries Recording)
2. Ledger  Book of  Posting
a. General Ledger Secondary (Classifying)
b. Subsidiary Ledgers entries
 Formats of the Books of Accounts

General Journal
A general journal can have the following format:
Date Column – Indicates the Account Titles Debit & Credit columns –
Account numbers Column
recording dates of the Column – The the monetary effects of the
– The corresponding
transactions. Transactions accounts affected by a transaction to the accounts
numberings of the
are recorded in the journal business transaction are recorded here.
accounts affected by the
chronologically, meaning are recorded in the
transaction are listed here.
arranged by dates. column

GENERAL JOURNAL
Date Account Titles Account #s Debit Credit
08/03/2016 Bad debts expense 540 250.00
Allowance for bad debts 125 250.00
to record the bad debts expense
for the period

Other columns may be included, such as “posting reference” which is used to

cross-reference journal entries to the ledger, and journal entry number (GJ No.) which
is used to number the journal entries.

Special Journal
A special journal can have the following format:

CASH RECEIPTS JOURNAL

Date Description Accounts Sales Sundry Credits Cash Debit
Receivable Credit Credit Account title Amount

Accounts that are normally Accounts affected by a The amount of credit The amount of cash
credited when cash collection is transaction other than to a “sundry” account collection (debit to
recorded are separately indicated “accounts receivable” and is recorded here. cash) is recorded
here. This eliminates the need to “sales” are recorded here. here.
record these accounts repeatedly “Sundry” means
to each time a collection is made. miscellaneous or various.
General Ledger & Subsidiary Ledgers

SUBDIARY LEDGERS GENERAL LEDGER

Customer A Customer A
Date Ref. Debit Credit Balance Date Ref. Debit Credit Balance
Balance forwarded 1,000.00 Balance forwarded 40,000.00
July 2, 20x1 4,000.00 5,000.00 July 2, 20x1 6,000.00 46,000.00

Customer B
Date Ref. Debit Credit Balance
Balance forwarded -
July 2, 20x1 2,000.00 2,000.00

Double-entry system
All transactions are recorded in the accounting records using the “double-entry system”. Using this system, each
transaction is recorded in two parts – debit and credit.
No transaction is recorded by a debit alone or a credit alone. For each amount that is debited, there must be
a corresponding amount that is credited, and vice-versa. This is in order for the accounting equation to be balanced
at all times. If at any time the accounting equation does not balance, there is an error.
Recall from our previous discussions that debit (Dr.) simply refers to the left side of an account, while credit
(Cr.) refers to the right side of an account.

Concept of Duality and Equilibrium

The double-entry system involves the use of the concepts of “duality” and “equilibrium”.
a. The concept of duality views each transaction as having a two-fold effect on values – a value received and value
parted with, and each transaction is recorded using at least two accounts.
b. The concept of equilibrium requires that each transaction is recorded in terms of equal debits and credits. For
every peso debited, there is corresponding peso credited, and vice versa.

Normal balances of accounts

The normal balance of an account is on the side where an increase in the account is recorded. The following are the
normal balances of accounts.

Type of account Norma balance

Asset Debit
Liability Credit
Equity Credit
Income Credit
Expense Debit

To let us remember the normal balances of accounts, let us recall the expanded basic accounting equation.

Assets = Liabilities + Equity + Income - Expenses

Notes:
 “Assets” which is on the left side of the equation has a normal debit balance.
  ”Liabilities”, “Equity”, and “Income” which are additions on the right side of the equation have normal credit
balances.
 ”Expenses” which is a deduction on the right side of the equation has a normal debit balance.
 Income increases equity, thus, it has a normal credit balance (same with equity). Expense decreases equity,
thus, it has a normal debit balance (opposite of that of equity).
 Another way to depict the normal balances of the accounts is as follows:

DEBITS CREDITS
Assets + Expenses = Liabilities + Equity + Income

Friendly advice: I encourage you to memorize the normal balances of the accounts as this will make your
study of accounting much easier.

Rules of Debits and Credits

To debit an account with a normal debit balance means to increase that account. To credit it means to
decrease it.
To credit an account with a normal credit balance means to increase that account. To debit it means
to decrease it. Analyze the table below:

Type of account Norma balance Debit Credit

Asset Debit Increase Decrease
Liability Credit Decrease Increase
Equity Credit Decrease Increase
Income Credit Decrease Increase
Expense Debit Increase Decrease

The previous concepts are integrated in the following illustration:

Balance Sheet Accounts:

ASSET ACCOUNTS LIABILITY ACCOUNTS

Debit for Credit for Debit for Credit for
increases (+) decreases (-) decreases (-) increases (+)

EQUITY ACCOUNTS
Debit for Credit for
decreases (-) increases (+)
Income Statement Accounts:

EXPENSE ACCOUNTS INCOME ACCOUNTS

Debit for Credit for Debit for Credit for
increases (+) decreases (-) decreases (-) increases (+)

Ending balance of an account

Debits to a specific asset or expense account should be greater than (or equal to) the credits
to that account. On the other hand, credits to a liability, equity or income account should
be greater than (or equal to) the debits to that account
The difference between the monetary totals of debits and credits to an account
represents the ending balance of that account. The minimum ending balance of an account
is zero. This occurs when the total debits equal total credits to an account.
If an asset or expense account results to an ending balance that is a credit, meaning
the total amount of debits is less than the total amount of credits, the account is said
to have an abnormal balance. This means recording error has been committed. A
correction is needed to eliminate the abnormal balance. This is also true when
liability, equity or income account results to an ending balance that is a debit. Analyze
the T-accounts below:
1.
ASSET ACCOUNT
Debit Credit
100 20
80

Ending Balance (100 Dr. – 20 Cr.) NORMAL*

*The ending balance of P80 is a “normal balance” because debit is greater than the
total credits.
2.
ASSET ACCOUNT
Debit Credit
100 100
0

Ending Balance (100 Dr. – 100 Cr.) NORMAL*

*The asset account has a zero balance. This is the minimum balance an asset account can
have. A zero balance occurs when total debits equal total credits.
3.
 ASSET ACCOUNT
Debit Credit
100 120
20

Ending Balance (100 Dr. – 120 Cr.) ABNORMAL*

*The ending balance of the asset account is an “abnormal balance” because the total
debits are less than the total credits.
4.
LIABILITY ACCOUNT
Debit Credit
100 70
30

Ending Balance (70 Cr. – 100 Dr.) ABNORMAL*

*The ending balance of the liability account is an “abnormal balance” because the total
credits are less than the total debits.

Illustration: Rules of debits and credits

Case #1: Asset account

At the beginning of the period, you have a cash balance of P2,000. During the
period, you had total cash collections amounting to P10,000 and made total cash
payments of P8,000.

Requirement: Using “T-account” analysis, compute for the ending balance of your cash.

Solution:
Cash
Debit Credit
Beginning
balance 2,000
Cash collections 10,000 8,000 Cash payments
Ending balance 4,000

Notes:
 The beginning balance is placed on the debit side because “Cash” is an asset
account and assets have a normal debit balance.
 Cash collections increase the balance of cash; thus, they are placed on the debit
side.
 Cash payments decrease the balance of cash; thus, they are placed on the credit
side.
 The ending balance is the difference between the debits and credits in the
account. It is computed as follows: 2,000 Dr. + 10,000 Dr. – 8,000 Cr. = 4,000
ending balance.
 The 2,000 and 10,000 amounts are added because that are both debits. The 8,000
amount is deducted because it is a credit.

Case #2: Liability account

At the beginning of the period, you have a note payable of P1,200. During the period,
you obtained an additional loan amounting to P800 and made total payments of P500.

Requirement: Using “T-account” analysis, compute for the ending balance of notes
payable.

Solution:

Notes Payable
Debit Credit
Payments on the 1,200 Beginning balance
loan 500 800 Additional loan
1,500 Ending balance
Notes:
 The beginning balance is placed on the credit side because “Notes Payable” is a
liability account and liabilities have a normal credit balance.
 Additional loan increases the balance of notes payable; thus, it is placed on the
credit side.
 Payment of loan decreases the balance of notes payable; thus, it is placed on the
debit side.
 The ending balance is the difference between the total credits and total debits
in the account. The ending balance is computed as follows: 1,200 Cr. + 800 Cr. –
500 Dr. = 1,500
 The 1,200 and 800 amounts are added because they are both credits. The 500 amount
is deducted because it is a debit.

Contra and Adjunct accounts

Some accounts have related accounts to them. An account related to another account is
referred to as either a contra account or an adjunct account.
 Contra accounts are presented in the financial statements as deduction to their
related accounts
 Adjunct accounts are presented in the financial statements as addition to their
related accounts.

Thus:
 If an account has a normal debit balance, its contra account has a normal credit
balance (the opposite). To credit a normal debit balance means to deduct.
 If an account has a normal debit balance, its adjunct account has a normal debit
balance (the same). To debit a normal debit balance means to add.

On the other hand:

 If an account has a normal credit balance, its contra account has a normal debit
balance (the opposite). To debit a normal credit balance means to deduct.
 If an account has a normal credit balance, its adjunct account has a normal
credit balance (the same). To credit a normal credit balance means to add.

A contra asset account has a normal credit balance, while an adjunct asset account has
a normal debit balance.

Examples of accounts with contra accounts:

ACCOUNT RELATED ACCOUNT
 Accounts receivable  Allowance for bad debts
 Type of account: CONTRA ACCOUNT
  Building  Accumulated depreciation – building
 Type of account: CONTRA ACCOUNT
 Equipment  Accumulated depreciation – Equipment
 Type of account: CONTRA ACCOUNT

The sum of the balances of an account and its related contra or adjunct account
is called the net carrying amount (or simply the ‘carrying amount’) of that account.

Example 1:
Your accounts receivable has a balance of P100,000, while the related allowance for bad
debts account has a balance of P20,000. How much is the carrying amount of your
accounts receivable?

Solution:
P100,00
Accounts receivable 0
Allowance for bad debts (20,000)
Accounts receivable - net P80,000

The “Allowance for bad debts” is deducted because it is a contra account to

“Accounts receivable”.
Example 2:
You have a building with a historical cost of P1,000,000 and an accumulated
depreciation of P300,000. How much is the carrying amount of your building?
Solution:
P1,000,00
Building 0
Accum. Dep’n- building (300,000)
Building - net P700,000
SELF CHECK PROBLEMS

PROBLEM 1: TRUE OR FALSE

1. The three books of accounts are the journal, ledger and T-account.
2. Entity A has total accounts receivable of P12M. This information is most likely to
have been taken from the General Journal.
3. An account that necessarily needs a breakdown is called a controlling account.
4. The normal balance of an asset or expense account is debit, while the normal balance
of a liability, equity or income account is credit.
5. The system of recording used in financial reporting is called multiple-entry system.
6. When recording business transactions, you see to it that for every peso that you
debit, there is corresponding peso that you credit. You are applying the concept of
equilibrium.
7. Under the double-entry system, sometimes a business transaction is recorded through
a debit alone or a credit alone.
8. This morning you had cash of P100. During the day, you collected accounts receivable
of P20 from your friend and you spent P70 for transportation, meal and utilities
expenses. The ending balance of your cash is P190.
9. The cash collection from your friend in #7 above is recorded in your personal books
of accounts as credit to cash.
10. If you are a liability and your mama tells you that she will debit you, this means
that she will either decrease your allowance or put you up for adoption.

PROBLEM 2: “FOR CLASSROOM DISCUSSION”

The Books of Accounts
Instruction for number 1 to 6: Indicate the type of book of account that is most
relevant to the items described below.

Example: A business sells good on credit

Answer: Sales journal

1. A business purchases goods on account

2. A business sells goods on cash basis
3. A business purchases goods in exchange for notes payable.
4. A business purchases equipment for cash
5. A business wants to know the total amount that it owes to all of its suppliers.
6. A business wants to know how much it owes to each supplier.

Normal Balances of Accounts

Instructions for numbers 7 to 16: In COLUMN A, indicate whether the account is ASSET,
LIABILITY, EQUITY, INCOME or EXPENSE. If the account is a CONTA or ADJUNCT account,
indicate that as well (e.g., CONTRA ASSET). In COLUMN B, indicate the normal balance of
the account, i.e., DEBIT or CREDIT.
ACCOUNTS COLUMN A COLUMN B
7. Cash
8. Owner’s equity
9. Accounts receivable
10. Prepaid supplies
11. Accounts payable
12. Salaries payable
13. Accumulated
depreciation
14. Sales
15. Cost of sales
16. Depreciation

Rules of Debits and Credits

Instruction for numbers 17 to 20: Indicate how each of the accounts listed below are
increased (i.e., DEBIT or CREDIT)
17. Accounts receivable
18. Allowance for bad debts
19. Owner’s equity
20. Service fees

Ending balance of an Account

21. At the beginning of the period, Addy had a cash balance of P20,000 and a notes
payable of P15,000. During the period, Addy collected P11,000 accounts receivable, paid
P8,000 notes payable, and issued additional notes payable of P5,000 in exchange for
cash. How much are the ending balances of cash and notes payable, respectively?

“Call upon me in the day of trouble; I will deliver you, and you shall glorify me.”
(Psalms 50:15)
- END –