BASIC ACCOUNTING

ACCOUNTING EQUATION
Assets= Liabilities + Equity
An assets of an entity has two sources which are the liabilities (creditors) and equity (owners).

ASSETS
LIABILITIES EQUITY
Resources provided by the creditors Resources provided by sources other than
(creditor’s equity) creditors which comes from the owner(s)
(owner’s equity)

 ASSETS are resources obtained and controlled by the enterprise as a result of a past
event and from which probable future economic benefits are expected to flow to the
enterprise.
 LIABILITIES are present obligations arising from a past event, the settlement of which is
expected to result in an outflow of resources from the enterprise.
 EQUITY is the residual right or interest of the owner(s) in the entity’s assets.

NORMAL BALANCES OF ACCOUNTS

ACCOUNTS DEBIT CREDIT
Assets X
Contra Assets X
Liabilities X
Contra Liabilities X
Owner’s Equity X
Owner Investment /Capital X
Owner Drawings X
Revenue X
Contra Revenue X
Cost of Goods Sold X
Contra Cost of Goods Sold X
Expense X

Assets account examples

 Cash
 Accounts Receivable
 Fixed Assets
o Buildings, Equipment, Furniture and Fixtures
 o Accumulated Depreciation (CONTRA-ASSET)
 Supplies
 Inventory
 Prepaid Expenses (Rent, Insurance, etc)
Liabilities Account Examples
 Accounts payable
 Notes Payable
 Bonds payable
 Discount on bonds payable (CONTRA-LIABILITY)
Equity Account Examples
 Owner or partner Capital/ Investment
 Withdrawals BEHAVES LIKE A CONTRA- EQUITY)
 Retained Earnings (corporation)
Revenue Account Examples
 Sales or Fee income
 Sales discount (CONTRA-REVENUE)
 Sales returns and allowances (CONTRA-REVENUE)
Cost of goods Sold Examples
 Purchases
 Freight in
 Purchase discounts (CONTRA-COGS)
 Purchase returns and allowances (CONTRA-COGS)
Expense Account examples
 Advertising expense
 Rent expense
 Supplies expense
 Utilities expense

ACCOUNTING CYCLE FOR SERVICE BUSINESS

1. JOURNALIZING- The process of recording business transactions in journal.
Journal- book of original entry
Each journal entry contains the following items
1. Date
2. The account tile and amount to be debited
3. The account title and amount to be credited
4. Explanation
Examples:
Transaction 1. On December 1, Jaime Santos invested P500, 000 cash and a
computer equipment worth P100, 000.
Journal Entry:
Cash 500,000
Computer Equipment 100,000
Jaime Santos, Capital 600,000
Initial investment by owner
Transaction 2. Also on December 1, he purchased a condo-office unit for P1,
200, 000, making a P200, 000 down payment and signing a promissory note for
P1, 000, 00 payable to the seller after two years.
Journal Entry:
Condominium Unit 1, 200, 000
Cash 200,000
Note Payable 1, 000 000
Purchased a condominium unit for office use
Transaction 3. On December 2, he purchased P5, 000 office supplies on
account, payable after 10 days.
Journal Entry:
Office Supplies 5, 000
Accounts payable 5,000
Purchased office supplies on account
Transaction 4. On December 2, he paid P4, 000 on the account payable created
in transaction 2.
Journal Entry:
Accounts Payable 4, 000
Cash 4, 000
Partial payment of account
Transaction 5. On December 13, he remolded his personal residence. This is not
a transaction of the law practice, hence, no journal entry is necessary.
Transaction 6. On December 14, Jaime withdrew P20, 000 cash for personal
living expenses,
Journal Entry:
Jaime Santos, withdrawals 20, 0000
Cash 20, 000
Withdrawal of cash by owner
Transaction 7. On December 16, Jaime performed service for a client and
collected P80, 000 cash.
Journal Entry:
Cash 80, 000
Service Revenue 80, 000
Performed service and received cash
Transaction 8. On December 18, Jaime performed Service for a client and billed
for P100, 000 on account receivable.
Journal Entry:
Accounts Receivable 100, 000
Service Revenue 100, 000
Performed service on account
Transaction 9. On December 19, Jaime performed legal service of P70, 000 for a
client, who paid P30, 000 cash immediately, Jaime billed the remaining P40, 000
to the client on account receivable.
Journal Entry:
Cash 30, 000
Accounts receivable 40, 000
Service Revenue 70, 000
Performed service for cash and on account
Transaction 10. On December 21, Jaime paid the following cash expenses:
transportation expense, P 9,000; employee salary, P15, 000; and utilities, P5,
000.
Journal Entry:
Transportation Expense 9,000
Salary expense 15,000
Utilities expense 5, 000
Cash 29, 000
Paid cash expenses
Transaction 11. On December 22, Jaime received a telephone bill for P1, 200
and will pay the expense the following week.
Journal Entry:
Utilities expense 1, 200
Accounts payable 1, 200
Received utility bill
Transaction 12. On December 23, Jaime collected P50, 000 cash from the client
for account receivable, established in Transaction 8.
Journal Entry:
Cash 50, 000
Accounts Receivable 50, 000
Received cash on account
Transaction 13. On December 23, Jaime paid the telephone bill that was
received and recorded in in Transaction 11.
Journal Entry:
Accounts Payable 1, 200
Cash 1, 200
Paid cash on account
Transaction 14. On December 25, Jaime withdrew P20, 000 cash for personal
use.
Journal Entry
Jaime Santos, Withdrawals 20, 000
Cash 20, 000
Withdrew cash for personal use.
2. POSTING TO THE LEDGER-means transferring the amounts from the journal to
the appropriate accounts in the ledger Debits in the journal are posted as debits
in the ledger, and credits in the journal as credits in the ledger
Ledger- book of final entry
Steps in the Posting Process
A. Based on the first debit entry in the journal, look for the account in the general
ledger
B. Enter the date of the journal entry
C. Copy the amount in the debit column extend the balance in the last column
D. Enter the journal letter and page number in the posting reference column
E. Insert the ledger account number in the folio column or posting reference of
the journal
F. Repeat steps 1-5 for the next account to be posted.
 =
EXAMPLES
 3. PREPARING THE TRIA BALANCE
Trial balance- a listing of the ledger accounts and their balances in the ledger
that aids in proving the equality of the debits and credits.
Jaime Santos Law Firm
Trial Balance
December 31, 2019
Balance
Debit Credit
Cash P 385,000
Accounts Receivable 90,000
Office Supplies 5,000
Computer Equipment 100,000
Condominium Unit 1,200,000
Accounts Payable P 1,000
Notes Payable 1,000,000
Jaime Santos, Capital 600,000
Jaime Santos, Withdrawals 40,000
Service Revenue 250,000
Utilities Expense 6,200
Salary Expense 15,000
Transportation Expense 9,000
Total P 1,851,000 P 1,851,000

Instructions:
a) Journalize and post the transactions.
b) Prepare a trial balance.

Exercise No. 1
Jan Jansen opened Jan's Window Washing on July 1, 2019. During July the following
transactions were completed.
July 1- Invested P8, 000 cash in business.
July 1- Purchased used truck for P6, 000, paying P3, 000 cash and the balance on
account.
July 3- Purchased cleaning supplies for P900 on account.
July 5- Paid P1, 200 cash on one‐year insurance policy effective March 1.
July 12- Billed customers P2, 500 for cleaning services.
July 18- Paid P1, 000 cash on amount owed on truck and P500 on amount owed on
cleaning supplies.
July 20- Paid P1, 200 cash for employee salaries.
July 21- Collected P1, 400 cash from customers billed on July 12.
July 25- Billed customers P3, 000 for cleaning services
July 31- Paid gas and oil for month on truck P200
July 31- Withdrew P600 cash for personal use.

Exercise No. 2:
June 16 - Juan de la Cruz, proprietor, invested his P100, 000 cash savings in a repair
shop. De la Cruz registered the business under the name "Reliable Repair Shop"
June 16, Bought shop tools, on cash basis, P12, 000
June 17 - Bought shop equipment from Grasco Equipment Corporation, P65, 500.
Term: on credit
June 17 - Paid the City Hall for the necessary business permits and licenses, P1, 950,
June 18 - Bought supplies from Weldone Industries, Inc, P3, 000. Term: cash
June 19 Bought supplies from McMaster Industries, Inc., on credit, P8, 500.
June 19 - Borrowed P20, 000 from a finance company, to be used to meet the cash
requirements of the shop. Term: 2-year, 12% note maturing on June 19, 20-3.
June 25 - Rendered repair services to cash customers from June 20 to 25, P13, 250.
June 25 - Rendered repair service to various customers from June 20 to 25, P18, 500.
Term: on credit.
June 25 - Paid in full the amount due to Grasco Equipment Corporation.
June 26 - Collected in full the P2, 500 due from Karlo Mijares, one of the customers who
received services from the business on credit basis.
June 27 - Paid the wages of a part-time shop assistant, for the period from June 18 to
27, P3, 000.
June 30 - Paid rent to Fame Realty covering the period from June 16 to August 15,
P14, 000.
June 30 - A tenant who operates a copier machine is using a small corner of the shop.
Rent collected from June 16 to July 15 amounted to P800.
June 30 - Juan de la Cruz withdrew P10, 000 cash from the business' collections, for his
family's use.