MODULE 5 - JOURNALIZING

Site: New Era University Virtual Learning Environment Printed by: John Dwyane L. Paraiso
Course: ACTG00-19 - Fundamentals of Accounting Date: Tuesday, 15 August 2023, 5:26 PM
Book: MODULE 5 - JOURNALIZING
 Description

Lesson 1: Title
 Table of contents

1. Introduction/Overview

2. Learning Objectives

3. Lesson 1: Double Entry Bookkeeping

4. Lesson 2: Rules of Debit and Credit

5. Lesson 3: Recording and Classifying Process

5.1. Journalizing the Business Transactions

6. Discount

7. Interest

8. Illustrative Problem
 1. Introduction/Overview

The preparation of journal entries is crucial since incorrect journalizing of transactions will have a domino effect in the accounting process
that ultimately leads to incorrect financial reports.

This chapter discusses the principle of double-entry bookkeeping system, the rules of debit and credit, the illustration of a complete journal
entry and the books to which the journal entries are to be recorded.
 2. Learning Objectives

Understand the principle of double-entry bookkeeping system.

Know the difference between a debit and a credit.
Identify and demonstrate the rules of Debit and Credit.
Identify the books of accounts to which the journal entries are to be recorded.
Prepare the correct and complete journal entry.
 3. Lesson 1: Double Entry Bookkeeping

Double Entry Bookkeeping is based on the fundamental accounting assumption that all business transactions have two-fold effects – that for
every value received, there is a corresponding equal value given up.

Account is a sorting device used to record, classify, and summarize the increases and decreases in the balance of each accounting element
as a result of the completed transactions of the business enterprise.
4. Lesson 2: Rules of Debit and Credit
 5. Lesson 3: Recording and Classifying Process

PROCESS

Step 1. Compile and arrange the source documents that support the transactions.

Step 2. Analyze the business transactions and determine their two-fold effects on the accounting elements.

Step 3. Journalize the business transactions in the books of original entry called journals.

Step 4. Post the journal entries to the books of final entry called ledgers.

Step 5. Prepare the unadjusted trial balance.

Book of Accounts

Business enterprises should keep certain financial records, called books of accounts, where business transactions are recorded,
classified, and summarized.
The most commonly kept books of accounts are grouped into two: journals and the ledgers.

Journals

- book of account where a business transaction is recorded for the first time

- also referred to as books of original entry

Kinds of Journal

General Journal – all types of business transactions can be recorded in here

Special Journals – may be used to be able to group specific types of transactions in one book of original entry (e.g. cash receipts
journal, cash payments journal)

Advantages:

- Since the transactions are recorded in the journals in chronological order, it then becomes easier to locate a transaction.

- The process of classifying and sorting of the financial data is facilitated since both debit and credit account titles and amounts are clearly
and systematically reflected on the same page of the journal.

- The use of journals helps avoid omissions or duplications in the recording and posting process.

- The task of auditing the records becomes less difficult since the auditor could clearly see how the accountant recorded each business
transaction.
 5.1. Journalizing the Business Transactions

Journalizing is the process of analyzing and recording or entering a business transaction in a journal.

A journal entry has the following parts:

a. the date when the transaction occurred

b. the effects of the transaction as reflected by the account titles debited and account titles credited

c. the monetary values (debit values and credit values) assigned to each accounting element that is affected by the transaction

d. a brief and clear explanation

e. the posting references showing the code of the designation ledger account

A journal entry with two or more debits and/or credits is called a compound entry. When an entry involves two or more debit items, their
account titles and amounts must all be recorded ahead of the credit account titles and their amounts.

Manner of recording in the general journal:

1. Write the page number on the upper right hand corner of the general journal.

2. Write the date (month and day) on the DATE column.

3. In the ACCOUNT TITLE/EXPLANATION column, enter the account/s to be debited. The amounts will be entered on the DEBIT column.

4. Below the debit entry, enter the account/s to be credited.. The amounts will be entered on the CREDIT column.
5. Below the credit entry, write a brief explanation of the transaction being recorded.

SAMPLE JOURNAL ENTRY:

 6. Discount

Discount granted on revenue is recorded as follows:

- if the discount is granted at the time of the transaction, it is netted against the revenue. It means that the revenue is recorded net of the
discount.

- if the discount is granted after the time of transaction, it is debited either to Service revenue or Service discount account.

Illustration:

a. On July 1, a CPA rendered service to a cash client, P50,000 less 10% discount.

July 1 - Cash 45,000

Service revenue 45,000

Rendered service on cash.

b. On July 1, a CPA rendered service to a client on account, P50,000. After 15 days the client paid his account and was given 10% discount.

July 1 - Accounts receivable 50,000

Service revenue 50.000

Rendered service on account.

July 16 - Cash 45,000

Service revenue (or Service discount) 5,000

Accounts receivable 50,000

Collected the account in full

net of 10% discount.

c. On July 1, a CPA rendered service to a client on account, P50,000. Terms: 5/15, n/30.

July 1 - Accounts receivable 50,000

Service revenue 50.000

Rendered service. Terms: 5/15, n/30.

If collected on or before July 16:

July 16 - Cash 48,500

Service revenue (or Service discount) 1,500

Accounts receivable 50,000

 Collected the account in full

If collected after July 16:

July 16 - Cash 50,000

Accounts receivable 50,000

Collected the account in full

Types of Discount on Asset Purchases

1. Trade discount – discount given in consideration of the volume or the amount purchased. It is an outright deduction from the list price.

Rule: Trade discount is not recorded in the books of either the seller or the buyer, meaning the transaction is recorded net of the discount.

2. Cash Discount – a discount given to the buyer for paying within a specified period of time which is usually earlier than the credit period.
Given in consideration of prompt payment.

Rule: Cash discount on asset purchased should be recorded as deduction from the asset account.

Illustration:

a. On July 1, the business purchased office supplies on cash with a list price of P20,000. It was granted 5% trade discount.

July 1 Office supplies 19,000

Cash 19,000

Purchased office supplies on cash.

b. On July 1, the business purchased office supplies amounting to P20,000. Terms: 2/10, n/15.

July 1 Office supplies 20,000

Accounts payable 20,000

Purchased office supplies. Terms: 2/10, n/15.

If paid on or before July 11:

July 16 - Accounts payable 20,000

Office supplies 400

Cash 19,600

Paid the account in full

If paid after July 11:

July 16 - Accounts payable 20,000

Cash 20,000

Paid the account in full

 7. Interest

Interest is the cost of using money. It is normally associated with an issuance of a promissory note.

Formula: I = Prt

P – principal, the amount of obligation.

r – rate, expressed in percentage and normally per annum (year) unless stated otherwise.

t – time, the period from the date of the note up to its maturity.

Example: Compute for the interest on a 30-day, 6% note amounting to P100,000.

I = 100,000 x .06 x 30/360

= 500

Note: Interest received by the holder of the note is income while interest paid by the issuer is expense.

Illustration:

a. On July 1, the business issued a 30-day, 8%, promissory note for the office equipment it purchased amounting to P150,000.

July 1 Office equipment 150,000

Notes payable 150,000

Purchased office equipment and issued 30-day, 6% note.

Upon maturity:

July 31 – Notes payable 150,000

Interest expense 1,000

Cash 151,000

In full settlement of note.

b. On July 1, the business received a 30-day, 8%, promissory note for the services rendered to a client amounting to P150,000.

July 1 Notes receivable 150,000

Service revenue 150,000

Rendered service. Terms: 30-day, 6% note.

Upon maturity:

July 31 – Cash 151,000

Interest income 1,000

Notes receivable 150,000

In full settlement of note.

60-day 6% Method

This method is useful in mentally computing for interest if the term is 60 days and the rate is 6% and their derivations.

If the term is 60 days and the rate is 6% - move 2 decimal places to the left.

90 days 6% - move 2 decimal places to the left x 150% or 1½.

60 days 9% - move 2 decimal places to the left x 150% or 1½.

90 days 9% - move 2 decimal places to the left x 150% x 150%

120 days 6% - move 2 decimal places to the left then multiply by 200% or 2.

60 days 12% - move 2 decimal places to the left then multiply by 200% or 2.

30 days 6% - move 2 decimal places to the left / 200% or 2.

60 days 3% - move 2 decimal places to the left / 200% or 2.

The derivations are determined by the ratio of the actual term over 60 days or the actual rate over 6%.
 8. Illustrative Problem

Mr. Kuh Lang opened a delivery business. The following are the transactions during the month.

Dec 1 – The owner invested P 300,000 in cash and delivery trucks valued at P500,000.

2 – Purchased for cash office supplies, P3,500

3 – Bought from A & G Co. office equipment costing P50,000. Terms 3/15, n/30.

4 – Customers paid P 12,000 cash for services rendered

10 – ABC Corp issued a 15-day, 9% note for services rendered amounting to P120,000.

17 – Rental for the month of December was paid, P15,000

18 – Paid in full the account with A & G Co.

19 – Billed XYZ Corp. for services rendered, P60,000.

20 – Paid fuel and oil, P21,000.

21 – Services rendered, P30,000. Terms: 50% down, balance n/30

25 – Collected the note of ABC.

28 – Collected the account of XYZ Corp.

29 – Paid the electricity bill, P6,000.

30 – Paid wages of drivers and helpers, P40,000

31 – The owner withdrew P10,000 for his personal use.

Record the above transactions in the general journal.

ANSWERS:

Dec. 1 Cash 300,000

Delivery equipment 500,000

K. Lang capital 800,000

Initial investment of the owner.

2 Office supplies 3,500

Cash 3,500

Purchased office supplies on cash.

3 Office equipment 50,000

 Accounts payable 50,000

Purchased office equipment.

Terms: 3/15, n/30

4 Cash 12,000

Service revenue 12,000

Rendered service on cash.

10 Notes receivable 120,000

Service revenue 120,000

Rendered service. Terms: 15-day

9% note.

17 Rent expense 15,000

Cash 15,000

Rent for December.

18 Accounts payable 50,000

Office equipment 1,500

Cash 48,500

Paid the account in full.

19 Accounts receivable 60,000

Service revenue 60,000

Rendered service on account.

20 Fuel and oil 21,000

Cash 21,000

Paid fuel and oil.

21 Cash 15,000

Accounts receivable 15,000

Service revenue 30,000

Rendered service. Terms: 50% down,

 balance n/30.

25 Cash 120,450

Notes receivable 120,000

Interest income 450

Collected the note in full.

28 Cash 60,000

Accounts receivable 60,000

In full of account.

29 Light and water 6,000

Cash 6,000

Electricity bill for December.

30 Salaries expense 40,000

Cash 40,000

Salaries for December.

31 K. Lang Drawing 10,000

Cash 10,000

Withdrawal of the owner.