WEEK 4-5 SEPT. 7 TO SEPT.

19, 2020
Big Picture in Focus: SLO (d) Prepare journal entries (journalizing), post the entries
(Classifying ) and prepare a trial balance (summarizing).

METALANGUAGE
For you to demonstrate SLO (d), you need to analyze the accounting equation and identify the
normal balances of the elements of financial statements. The most essential terms in analyzing
the accounting equation is define to establish common understanding as to how these terms
are use in this lesson.

1. Accounting Equation shows the relationship of the elements of financial statements.

The basic accounting equation is Assets (A) is equal to the total of Liabilities (L) and
Owner’s Equity (OE) (A= L + OE). The equation presents the resources (Assets)
controlled by enterprise, the present obligation (liabilities) and the residual interest
(Equity). All quantifiable business transaction of an enterprise has an effect to the
accounting equation. Under the double-entry bookkeeping system, the rule is for every
value received (debit), there is always a value being parted with (credit). Every
transaction can be analyzed or expressed in terms of its effects on the accounting
equation. Always bear in mind that since this is an equation, both sides (left and right)
must be maintained equal. From the equation is very clear that the source of assets
are the two parties on the right side of the equation creditors/lenders (liabilities) and
owners (capital + revenue) less (drawing and expenses)).

2. Normal Balances of an Account – the normal balance of any account refers to the side
of the account – (debit or credit) where increases are recorded. Assets, owner’s
withdrawal and expense account normally have debit balances; while liability, owner’s
equity and income accounts normally have credit balances.

Summary of normal balances

Increases is recorded by Normal Balance

Accounts Debit Credit Debit Credit
Assets / /
Liabilities / /
Owner’s
Equity:
Capital / /
Withdrawal / /
Income / /
Expenses / /

3. Source of Assets (SA) – these are transactions that normally increases assets, and
increases also either the liabilities or owner’s equity.
 4. Exchange of Assets (EA) – these are transactions that normally has no effect in the
total assets because one component of Assets has increase with a corresponding
decrease of another form of asset.
5. Use of Assets (UA) – these are transactions that normally decreases the assets and
decreases either the owner’s equity (expenses) or decreases the liability.
6. Exchange of Claims (EC) – these are transactions that has no effect on asset because
only the right side of the equation has movement, which is either increase in owner’s
equity with corresponding decrease in liability or decrease in owner’s equity with
corresponding increase in liability.

ESSENTIAL KNOWLEDGE:

Let us start analyzing a transaction:

Example:
1. Mr. X invested cash of P100,000 to engage in a car wash business. (SA)
Analyzing this using the dual effect, the value received by the entity is cash, and the
value parted with, is the recognition of the investment of owner, capital. Using the
accounting equation the value received cash represents an increase in asset (cash),
and the value parted with is increase in equity (capital).

Applying the normal balance:

Increase in Asset (Cash) is place on the debit side (left)
Increase in Owner’s Equity (capital) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.1.19 Cash. . . . . . . . . . P100,000
X capital…………….. P100,000
To record Mr. X initial investment

In making the entry, you have to use the specific account title of the elements of FS.
That’s why you have to possess a sound knowledge of the chart of accounts and its usage.
Observe the journal entry using the general format, you should write the debit first, then
credit must be indented from the debit. You have to strictly follow the above format, do
not make your own format. After each entry you have to put a brief description of the
nature of the transaction. This is as important as the entry, because in the real world of
accounting there is no narrative statement of the transaction but only a short
description.

2. Mr. X bought shop equipment for the cash wash business in cash amounting to
P40,000. (EA).
Analyzing this using the dual effect, the value received by the entity is shop
equipment, and the value parted with, is the cash paid to the supplier of shop
equipment (which is another form of asset) Using the accounting equation the value
 received shop equipment represents an increase in asset (shop equipment), and the
value parted with is cash which is decrease another form of asset.

Applying the normal balance:

Increase in Asset (Shop equipment) is place on the debit side (left)
Decrease in Asset ( cash) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.2.19 Shop Equipment . . . . . . . . . P40,000
Cash.…………….. ……………………..P40,000
Bought various shop equipment for cash.

3. Mr. X bought additional compressor (shop equipment) from XYZ Trading on credit
amounting to P25,000. (SA)
Analyzing this using the dual effect, the value received by the entity is shop
equipment, and the value parted with, is the recognition of a liability (accounts
payable) to the supplier. Using the accounting equation the value received shop
equipment represents an increase in asset (shop equipment), and the value parted
with is accounts payable which is increase in liability.

Applying the normal balance:

Increase in Asset (Shop equipment) is place on the debit side (left)
Increase in Liability ( account payable) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.3.19 Shop Equipment . . . . . . . . . P25,000
Accounts Payable -XYZ trading ……..P25,000
Bought compressor on credit.

4. Mr. X paid the business permit and BIR registration for a total amount of P3,500 in
cash. (UA).
Analyzing this using the dual effect, the value received by the entity is right to operate
a business by paying taxes (taxes expense) and the value parted with, in exchange of
the right is cash. Using the accounting equation the value received taxes expense
represents a decrease in owner’s equity (taxes expense), and the value parted with is
cash which is decrease in asset.

Applying the normal balance:

Decrease in Owner’s Equity (Taxes expense) is place on the debit side (left)
Decrease in Asset (Cash) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.4.19 Taxes Expense . . . . . . . . . P3,500
Cash …………………………….. P3,500
 Payment for business permit and BIR registration.

5. Mr. X rendered services to various customers and received cash amounting to

P15,000. (SA)
Analyzing this using the dual effect, the value received by the entity is cash, and the
value parted with, is the recognition of the income (service Income) which is an
owner’s equity account. Using the accounting equation the value received cash
represents an increase in asset (cash), and the value parted with is increase in equity
( service income).

Applying the normal balance:

Increase in Asset (Cash) is place on the debit side (left)
Increase in Owner’s Equity (service income) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.5.19 Cash. . . . . . . . . . P15,000
Service Income……P15,000
Services rendered in cash

6. Mr. X make partial payment to the account in no.3 amounting to P5,000. (UA)
Analyzing this using the dual effect, the value received by the entity is the partial
extinguishment of an obligation (accounts payable to XYZ) and the value parted with,
in exchange of cash. Using the accounting equation the value received accounts
payable represents a decrease in liability (accounts payable), and the value parted
with is cash which is decrease in asset.

Applying the normal balance:

Decrease in liabilities (Accounts Payable) is place on the debit side (left)
Decrease in Asset (Cash) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.6.19 Accounts Payable . . . . . . . . . P5,000
Cash …………………………….. P5,000
Partial payment to XYZ trading.

7. Mr. X rendered services to customer B who promise to pay next month amounting
to P 20,000. (SA)
Analyzing this using the dual effect, the value received by the entity is the right to
collect from customer B (Accounts Receivable) and the value parted with, is the
recognition of the income(service Income) which is an owner’s equity account. Using
the accounting equation the value received accounts receivable represents an
increase in asset (A/R), and the value parted with is increase in equity ( service
income).
Applying the normal balance:
Increase in Asset (A/R ) is place on the debit side (left)
Increase in Owner’s Equity (service income) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.7.19 Accounts Receivable. . . . . . . . . . P20,000
Service Income…………………………P20,000
Services rendered on credit
8. Mr. X bought various shop supplies in cash amounting to P3,000. (EA) if company
use the asset approach in recording of supplies. But if the company uses the expense
approach then its (UA)

Analyzing it using asset approach (EA) Alternative 1

Analyzing this using the dual effect, the value received by the entity are the supplies
(regarded as asset) and the value parted with, is cash which is another form of asset.
Using the accounting equation the value received supplies represents an increase in
asset (supplies), and the value parted with is decrease in asset (cash).

Applying the normal balance:

Increase in Asset (supplies) is place on the debit side (left)
Decrease in Asset ( cash) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.10 Supplies . . . . . . . . . P3,000
Cash.…………….. ……P3,000
Bought shop supplies in cash.

Analyzing it using the expense approach (UA) Alternative 2

Analyzing this using the dual effect, the value received by the entity is supplies which
is regarded as expense, and the value parted with, is cash. Using the accounting
equation the value received supplies expense represents a decrease in owner’s equity
(supplies expense), and the value parted with is cash which is decrease in asset.

Applying the normal balance:

Decrease in owner’s equity (supplies expense) is place on the debit side (left)
Decrease in Asset (Cash) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

Supplies Expense . . . . . . . . . P3,000
Cash …………………………….. P3,000
Bought shop supplies in cash.
USING THE SAME TRANSACTION BUT INSTEAD OF BUYING IN CASH IT WAS BOUGHT ON
CREDIT.

Analyzing it using asset approach (SA). Alternative 1

Analyzing this using the dual effect, the value received by the entity are the supplies
(regarded as asset) and the value parted with, is an obligation to pay (accounts
payable). Using the accounting equation the value received supplies represents an
increase in asset (supplies), and the value parted with, which is an accounts payable
represents increase in liability.

Applying the normal balance:

Increase in Asset (Supplies) is place on the debit side (left)
Increase in liability (Accounts Payable) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

Supplies . . . . . . . . . P3,000
Accounts Payable………P3,000
Bought shop supplies on credit.

Analyzing it using the expense approach (EC). Alternative 2

Analyzing this using the dual effect, the value received by the entity is supplies which is
regarded as expense (supplies expense) and the value parted with, is an obligation to pay
(Accounts Payable). Using the accounting equation the value received supplies expense
represents a decrease in owner’s equity (supplies expense), and the value parted with is
an obligation to pay represents an increase in liability (accounts payable).

Applying the normal balance:

Decrease in owner’s equity (Supplies expense) is place on the debit side (left)
Increase in liability (Accounts Payable) is place on the credit side (right)

Therefore: the left side of the equation does not changed

The journal entry is:
Supplies Expense. . . . . . . . . P3,000
Accounts Payable . . . . . . . …. P3,000
Bought shop supplies on credit.

IMPORTANT REMINDER
To summarize the entry of this type of transaction shall depend on the method use by
the company. Again applying the principle of consistency, the company shall adopt a
method that is consistent from period to period. Either of the two approaches is
correct provided it is consistently applied.

9. Mr. X received cash from customer B as partial collection of account P8,000. (EA)
 Analyzing this using the dual effect, the value received by the entity is cash, and the
value parted with, is the right to collect (A/R). Using the accounting equation the value
received cash represents an increase in asset (cash), and the value parted with is the
right to collect (A/R) represents decrease in another form of asset ( A/R).

Applying the normal balance:

Increase in Asset (Cash) is place on the debit side (left)
Decrease in Asset ( A/R) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.12.19 Cash . . . . . . . . . P8,000
Accounts Receivable- cust. B. P8,000
Partial collection from customer B.

10. How to record income with down payment?

Mr. X rendered services to customer L amounting to P7,000. Customer L give a down
payment of P3,000 and the balance 1 month after. (SA)

Analyzing this using the dual effect, the value received by the entity is cash, and the
right to collect (A/R) and the value parted with, is income). Using the accounting
equation the value received cash represents an increase in asset (cash & A/R), and the
value parted, is service income, represents an increase in owner’s equity (service
income).

Applying the normal balance:

Increase in Asset (cash) is place on the debit side (left)
Increase in another asset (A/R) is place on the debit side (left)
Increase in owner’s equity (service income) is place on the credit side (right)

Therefore the Journal Entry to record the above transactions is:

5.14.19 Cash . . . . . . . . . . . . . . . P3,000
Accounts receivable ….. 4,000
Service Income . . . . . . . . . . P7,000
Rendered services on credit with partial payment.

11. How to record purchase of asset with down payment?

Mr. X purchased a welding machine for shop use amounting to P25,000 paid 20%
down payment and the balance is 30 days term. (SA)
Analyzing this using the dual effect, the value received by the entity is the welding
machine(shop equipment), and the value parted with, is the recognition of a liability
(accounts payable) to the supplier and the 20% down payment in a form of cash.
Using the accounting equation the value received shop equipment represents an
increase in asset (shop equipment), and the value parted with is accounts payable
 which is increase in liability and decrease in asset (cash). Therefore, the net effect in
asset is increase in asset amounting to P20,000 (25,000-5,000).

Applying the normal balance:

Increase in Asset (Shop Equipment) is place on the debit side (left)
Decrease in another asset (Cash) is place on the credit side (left)
Increase in Liability (Accounts Payable) is place on the credit side (right)
Therefore the Journal Entry to record the above transactions is:
5.20.19 Shop Equipment . . . . . . . . . . . . . . . P25,000
Accounts Payable ... ………………… 20,000
Cash ………………………. 5,000
Bought welding machine on credit with 20% down payment.

Note: Always remember that the value received is the account to be debited, and
the value parted with is the account to be credited.

HOW TO POST THE JOURNAL ENTRIES?

Rule 1. Prepare the General Ledgers (GL) following the sequence of your chart of
accounts before posting.
Rule 2. Label the GL as to (a) account title; (b) date; (c) debit on the left and credit on
the right side.
Rule 3. Transfers the information from the journal to the GL placing the amount in the
same manner stated in the journal. For example if in the journal it is found on the
debit side then place it also on the debit side of the GL.
Rule 4. Do not forget to fill-up the ref. column of the journal and GL as you transfer
the data one by one.
Rule 5. After transferring all the data foot the GL (debit and credit), then get the
balance by subtracting the total of the debit and credit. Place the balance where it
belongs. If the sum of an account’s credit is greater than the sum of its debits then the
balance should be placed on the credit side it is called credit balance, but if the sum
of its debit is greater than the credit, then placed the balanced on the debit side it is
called debit balance.
Rule 5. Summarize all the balances extracted from GL and prepare a trial balance.

Please refer to the above entries for this posting sample.

SUMMARY OF EFFECTS

SELF-HELP : You can also refer to the sources below to help further understand the lesson.

 Ballada, Win & Ballada, Susan (2019), Basic Financial Accounting and Reporting.
Sampalok Manila: Domdane Publisher & Made Easy Books.
 Heintz, James A. (2017). College Accounting 22nd Edition. Australia: Cengage
Learning

LET’S CHECK
Activity 8. Knowing the elements and its classification is not enough you have to understand the
normal balances for you to correctly analyze the effect in the accounting equation. This activity
will test your understanding on the normal balances of the elements of FS. A perfect score is
required. The first item is answered for your reference. Pass on Sept. 9, 2020.
 LET’S ANALYZE
Activity 9. Understanding the normal balances is just a guide for you to correctly analyze the
effect of the transactions in the accounting equation. The most crucial part of the accounting
process is the journalizing function which is the recording of transaction in the journal. In this
activity you are going to identify the type of transactions (SA, UA, EA or EC), the value received
and parted with,(using the specific account title); the effect of the transactions and at the same
time identify where to place the increase or decrease of the accounts, is it on the debit? or on
the credit side. Again a perfect score is required so that that you can really prepare correctly the
journal entries. The first 2 transactions are answered for your reference. Pass on Sept. 11, 2020
YOUR TURN
Activity 10: We all know that the purpose of accounting is to provide quantitative information of
the business entity. In gathering this information accounting process follows a sequential
procedures in accumulating this information. The first step of the accounting process is the
preparation of journal entries. Your previous knowledge in account classification, identifying
normal balance, type of transaction and the effect of this transaction to the accounting equation
is very important. In this activity you are going prepare journal entries using the chart of accounts
(that you will also provide), post these journal entries to the General Ledger and extract the
balances from each general ledger.

April Anne Mangubat established Organic Gardening Planters, by providing gardening services
to the people during the quarantine period. This is the business that she decided to open which
is very timely during this covid crisis. During the first month of operations the following
transactions has occurred.
July 1, 2020 – Deposited the amount of P50,000 from her savings to her business bank account.
July 2, 2020 - She rented an office space at P1,000 per month and paid 3 months rent in advance.
July 3, 2020 – Paid business permit and other taxes amounting to P4,200.
July 4, 2020 – She bought gardening supplies on credit from a hardware P5,500.
July 5, 2020- Bought for cash various seeds for plantingP500.
July 7, 2020 – Billed customers for services rendered to various customers P 10,500.
July 10, 2020- Make partial payment for the account on July 2 P3,000.
July 13, 2020- Received cash from customer for the services rendered P8,000.
July 14, 2020- Collected cash from July 7, account P9,000.
July 15, 2020- Paid the services of the gardeners for the 1st half of the month P3,500.
July 20, 2020- Received cash from customer for the services to be rendered in the future P6,000.
July 23, 2020- Paid the electric and water consumption of the office P2,200.
July 27, 2020- Paid charges for advertising the company P800.
July 31, 2020- Paid the services of the gardeners for the 2nd half of the month P3,500.
July 31, 2020- The owner withdrew cash for personal use P3,500.
REQUIRED:
Prepare journal entries with brief explanation after each entry, post the entries to general
ledger and prepare a trial balance. You have to develop your own chart of accounts for this
type of business.
Pass this requirement thru a courier or email to me on Sept. 14, 2020.

Activity 11.
Anton Giles opened a laundry shop at Ma-a Davao City. He saw the potential of the business
because of the sprouting of condominium in the place. The following transactions transpired
during the month of August 2020.
August 1, 2020 – Opened an account with PNB amounting to P400,000.
August 2, 2020 – Bought Laundry Equipment costing P200,000, paying cash of P120,000 and
issued a note for the balance.
August 3, 2020 – Paid the business permits and business registration paying a total of P5,300.
August 4, 2020- Paid the following:
Rental for 6 months at P2,000 per month
Cost of renovation of the rented office (Leasehold Improvements) P20,000.
August 5, 2020 – Acquired a second-hand delivery van on credit P120,000.
August 8, 2020- Bought various laundry supplies on account amounting to P15,000
August 10, 2020- Rendered services to various customers for cash P7,500
August 11, 2020- Billed Medical Hospital for the services rendered from Aug. 4-10, amounting to
P40,000.
August 14, 2020- Paid PLDT for the telephone subscription for the month of August P990.
August 15, 2020- Paid the 1st half salary of the staff P5,000.
August 16, 2020- Paid the personal loan of Giles amounting to P10,000.
August 20, 2020- Paid the month rental amounting to P6,650 net of 5% withholding tax.
August 25, 2020-Collected cash from Medical Hospital amounting to P40,000.
August 26, 2020- Deposited to bank cash received from customers for services rendered P16,200.
August 28, 2020- Paid in full the account on Aug. 8.
August 29, 2020 – Paid partial for the delivery van bought on Aug. 5 amounting to P60,000.
August 31, 2020- Paid the 2nd half salary of staff P4,500, net of SSS premium w/holding of P300
and Philhealth premium withholding of P200.

Prepare journal entries (using the chart of accounts provided); Post to T-accounts (classifying
or sorting function of accounting) and Prepare the trial balance (Summarizing function of
accounting).
Pass this requirement thru a courier or email to me on Sept. 17, 2020.

NOTE: ALL JOURNAL ENTRIES MUST HAVE BRIEF EXPLANATION.

SCHEDULES
Activity Date of Submission Where to Submit/How
Activity 8 Sept. 9, 2020 CF’s email/courier
Activity 9 Sept. 11, 2020 CF’s email/courier
Activity 10 Sept. 14, 2020 CF’s email/courier
Activity 11 Sept. 17, 2020 CF’s email/courier
Q&A Sept. 8, and 12, 16 Collaboration/Zoom/Forum