ACCT 1A&B

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THE ACCOUNTING EQUATION & THE ACCOUNTING CYCLE: STEPS 1 4

~LECTURE~

The relationship between the three basic accounting elements of the

statement of financial position can be expressed in the form of the
Accounting equation.
ASSETS = LIABILITIES + EQUITY
The equality of the accounting equation is always maintained for every
transaction that is recorded.
Left side of the equation is called debit while the right side is called credit.
Business transactions are recorded in terms of debit and credit. Debit is the
value received or paid for by the business while credit is the value parted
with or given up. This called the dual effect of a transaction.

THE STEPS IN THE ACCOUNTING CYCLE

1. Analyzing the source documents
2. Journalizing the transactions in the journal
3. Posting the entries to the ledger
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a post-closing trial balance
9. Preparing the reversing entries
o
o

Steps 1 3 are part of the recording phase while the remaining steps
are in the summarizing phase.
Step 9 is an optional step in the accounting process.

Double-entry method of Bookkeeping

Every business transaction affects at least two accounts.
A method of recording the business transactions in terms of the dual effect on
the accounting elements.
Account an accounting device used to classify and store information about the
increases and decreases in a particular item.
T-account used to show the changes in an account caused by a transaction.
Account title
Left side
Right side
(debit)
(credit)

Rules of debit and credit

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Assets

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Liabilities &
Equity

Rules of Addition and subtraction by position

o Add on the same side and subtract on the opposite side.
Rules for asset accounts:
1. Add on the same side (debit)
2. Subtract on the opposite side (credit)
3. The normal balance for an asset account is a debit balance
Rules for liability and owners equity accounts:
1. Add on the same side (credit)
2. Subtract on the opposite side (debit)
3. The normal balance for a liability and owners equity account is a credit
balance
Rules for revenue accounts:
1. Add on the same side (credit)
2. Subtract on the opposite side (debit)
3. The normal balance for a revenue account is a credit balance
Rules for expense accounts:
1. Add on the same side (debit)
2. Subtract on the opposite side (credit)
3. The normal balance for an expense account is a debit balance
Trial balance a listing of all the balances of the different accounts as of a given
time.
- This is prepared at the end of each month.
- The total of all accounts with debit balances must equal with the total of all
accounts with credit balances at all times.
- Purposes: (1) to check the accuracy of posting by testing the equality of the
debits and credits. (2) it aids in locating errors in posting (3) it serves as a
basis in the preparation of the financial statements
Source documents the different documents, business forms and papers
evidencing or supporting a transaction, which serve as the basis for recording in the
books of accounts.
Book of accounts the accounting books where business transactions are
recorded.
- Consists of:
(1) GENERAL JOURNAL a two-column journal, called the book of original
entry because this is the first book where the business transactions are
recorded.
(2) GENERAL LEDGER called the book of final entry because this is the book
where the business transactions are finally recorded. Serves the same
purpose as the T-account but more formal and detailed. This is the Taccount expanded and formalized as a book.
- The process of recording in the journal is called journalizing while the process
of recording in the general ledger is called posting.
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The general journal

- An all-purpose journal in which all the business transactions may be recorded.
- Each entry made in the general journal includes the following information,
entered in this order:
(1) The date of the transaction
(2) The name of the account debited as well the amount.
(3) The name of the account credited as well the amount.
(4) A posting reference (PR) indicating the account number of the account
(5) A short explanation of the transaction.
Chart of accounts a list of all account titles and their account (code) numbers
used for journalizing business transactions.
- The accounts are normally listed in the order in which they appear in the
financial statements. (SFP accounts first [assets, liabilities, equity] then SCI
accounts [revenues and expenses])
The trial balance
1. Trial balance of balances widely used in practice.
2. Trial balance of totals preferable method by the BIR.

A balanced trial balance does not necessarily mean that no errors have been
committed. The following errors cannot be detected by the trial balance:
1. No entry was made for a given transaction.
2. A journal entry was not posted to the general ledger.
3. A journal entry was posted twice.
4. Incorrect accounts were used to record a given transaction.
5. Incorrect amounts were recorded for a given transaction.
If the trial balance does not balance, the following are the common mistakes
or errors:
1. Error in addition or subtraction in the general ledger or error in addition in
the trial balance itself.
2. Error of transposition, which means that digits are incorrectly
interchanged. (Ex. P 170 is recorded as P 107)
3. Sliding error or transplacement error, which means error in placing
decimal point. (Ex. P 200 is recorded as P 20)
If the trial balance does not balance, the following procedures may be
followed to detect the error/s
1. Get the difference between the total debits and total credits.
2. A difference of 10, 100, 1,000 etc. would probably indicate a simple error
in addition either in the trial balance or the general ledger.
3. If the difference is divisible by two, the error would be in posting to the
wrong side.
4. If the difference is divisible by nine, the error would probably be an error
in transposition or error in transplacement.

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~APPLICATION~
The Accounting Equation
1. B. Villaluz invested P 200,000 to start an auto repair business.
2. B. Villaluz bought repair equipment from Mismo Company on credit, P
100,000.
3. B. Villaluz bought shop supplies for cash, P 62,000.
4. Paid Mismo Company partially, P 60,000.
5. B. Villaluz received a bank loan for business use, P 100,000.
6. Customers paid cash for auto repairs services rendered, P 25,000.
7. Repair services rendered on account, P 50,000.
8. Paid a months rent, P 10,000.
9. B. Villaluz made partial collections from customers accounts, P 30,000.
10.B. Villaluz paid the salaries and wages of laborers, P 15,000.
11.Billed a customer, P 6,000 and received a partial payment of P 2,000.
12.Shop supplies purchased, P 15,000 and made a down payment of P 5,000.
13.Shop supplies bought for cash and used, P 18,000.
14.Cruz withdrew P 20,000 for his personal use.
Required: Indicate the effects of the above transactions on the accounting
equation shown below.
Assets
Cash

Accounts
receivable

Supplies

=
+

Equipment

Liabilities
Accounts
payable

+
Bank
loan

Owners Equity
Brian
Villaluz,
Capital

Revenues

Expenses

1
2
Balance
3
Balance
4
Balance
5
Balance
6
Balance
7
Balance
8
Balance
9
Balance
10
Balance
11
Balance
12
Balance
13
Balance
14
Balance

The accounting process steps 1 4

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Coleen Garcia, a lawyer decided to open a law firm named Garcia Law Firm. The
partial chart of accounts listed below will be used for recording purposes.

Chart of Accounts
Assets
A10
1
A10
2
A10
3
A10
4
A10
5

Cash

O50
1
O50
2

Income
Legal Fees Earned

Accounts Receivable
Prepaid Insurance
Office Supplies
Furniture and Equipment

Liabilities
L20
1
L20
2

I30
1

Expenses
E40
1
E40
2
E40
3
E40
4

Salary Expense
Advertising Expense
Utilities Expense
Miscellaneous Expense

Accounts Payable
Loan Payable
Owners Equity
Coleen Garcia, Capital
Coleen Garcia, Drawing

In December of the current year, the following transactions took place:

Dec
.

Coleen Garcia invested P 60,000 cash to put up her law firm.

4
6

A one-year insurance effective December 1 was paid, P 6,000.

Office furniture costing P 15,000 was purchased on account from Ellen
Adarna Furnitures.
Office supplies costing P 2,500 was bought for cash.
Received from PCIB P 60,000 for loan applied to be used in her law
practice.
Purchased on credit a desktop computer and printer for office use
costing P 60,000 from Micro Systems Inc.
Received P 12,500 cash for legal services rendered to Arci Muoz.

8
1
1
1
4
1
6
1
8
2

Paid P 1,000 for Miscellaneous expenses incurred.

Received P 10,500 cash for legal services rendered to clients.
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2
2
4
2
5
2
6
2
7
2
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9
3
0

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Advertising placed on a local paper for three months effective

December 1 was paid, P 3,600.
Various clients were billed for legal services rendered, P 16,400.
Micro Systems Inc. was partially paid, P 45,000.
Collected the accounts from various clients, P 7,500.
Light, water and telephone expenses for the month of December was
paid, P 1,500.
The salary of the secretary was paid, P 5,500.
Coleen Garcia withdrew P 12,000 for personal use.
Received P 5,000 for legal services rendered.

Required:
a. Journalize the above transactions in the general journal.
b. Post each journal entry to the general ledger.
c. Prepare a trial balance at December 31 of the current year.

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