Financial Accounting and Reporting Books of Accounts and Double Entry

System

BOOKS OF ACCOUNTS AND DOUBLE ENTRY

SYSTEM

Unit Learning Outcomes:

1. Identify the books of accounts
2. Describe the uses of the books of accounts
3. Explain the rule of debits and credits
4.

Topic 1: BOOKS OF ACCOUNTS

Time Allotment: 2 hours

Learning Objectives:
At the end of the module, you will be able to:
a. identify the uses of the two books of accounts (journal and ledger) to record
business transactions.
b. explain the use of general and special journals to record business transactions
c. discuss the use of general and subsidiary ledgers to record business
transactions.

Activating Prior Learning

Each item below, represents the each part of the general journal. Please identify
them.

GENERAL JOURNAL
(1) (2) ( 3) (4) (5)

How much score did you get?

Try to assess your performance based on the given scores and their descriptive
value.
5 - Excellent
4 - Good
3 - Fair
0-2 - Poor

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Financial Accounting and Reporting Books of Accounts and Double Entry
System

Congratulations! You did a great job.

Presentation of Content

Books of Account
A business maintains two books of accouns namely:
1. Journal
2. Ledger

Companies initially record transactions and events in chronological order (the order in
which they occur) through jourmnal entries. Thus, the journal is referred to as the book of
original entry. For each transaction the journal shows the debit and credit effects on
specific accounts.
There are two types of journals:

 the general journal and

 the special journal.
The general journal is the most basic journal. Typically, a general journal has spaces for
dates, account titles and explanations, references, and two amount columns. The journal
makes several significant contributions to the recording process:
• It discloses in one place the complete effects of a transaction.
• It provides a chronological record of transactions.
• It helps to prevent or locate errors because the debit and credit amounts for each entry
can be easily compared.

Figure 5.1: The general Journal

The special journals. Some businesses encounter voluminous quantities of similar and
recurring transactions which may create congestion if these transactions are recorded
repeatedly in a single day or a month in the general journal. In order to facilitate efficient
and practical recording of similar and recurring transactions, a special journal is used.
The following are the commonly used special journals:
• Cash Receipts Journal – used to record all cash that has been received

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Financial Accounting and Reporting Books of Accounts and Double Entry
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• Cash Disbursements Journal – used to record all transactions involving cash payments •
Sales Journal (Sales on Account Journal) – used to record all sales on credit (on account)
• Purchase Journal (Purchase on Account Journal) – used to record all purchases of
inventory on credit (or on account)

Examples:
1. You sold a homemade milktea to a customer who promise to pay nextweek.
 This transaction involves a sales on account and thus should be recorded
in the sales journal
2. You sold a milktea to a friend who immediate paid the sales price
 This transaction involves the receipt of cash sales and thus be
recorded in the cash receipts journal
3. You purchased ingrients from a supplier and agreed to pay your account
next month.
 This transaction involves the purchase on account and thus be
recorded in th purchases journal
4. You purchased supplies from a store and paid the items immediately.
 This transaction involves a cash payments and thus be recorded in
the cash disbursement journal

5. You received a utility bill to be settled next week.

 This transaction cannot be recorded in the special journals
therefore, it is recorded in the general journal
THE LEDGER
The ledger refers to the accounting book in which the accounts and their related amounts
as recorded in the journal are posted periodically. The ledger is also called the ‘book of
final entry’ because all the balances in the ledger are used in the preparation of financial
statements. This is also referred to as the T-Account because the basic form of a ledger is
like the letter ‘T’.
There are two kinds of ledgers, namely;

 the general ledger and

 subsidiary ledgers.
The general ledger (commonly referred by accounting professionals as GL) is a
grouping of all accounts used in the preparation of financial statements. The GL is a
controlling account because it summarizes all the activities that have taken place as
recorded in its subsidiary ledger
Figure 5.2: The General Ledger

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Financial Accounting and Reporting Books of Accounts and Double Entry
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A subsidiary ledger is a group of like accounts that contains the independent data of a
specific general ledger. A subsidiary ledger is created or maintained if individualized data
is needed for a specific general ledger account. Knowing only the total balance of your
receivable or payable is not sufficient. You should also have the their individual account
details. An example of a subsidiary ledger is the individual record of various receivables
to customers. The total amount of these subsidiary ledgers should equal the balance in the
Accounts Receivable general ledger.
Figure 5.3: Sample Subsidiary Ledger

Accounts Receivable
Subsidiary Ledger
Customer :
Customer No:
Address:
Date Item Ref Debit Credit Balance

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Financial Accounting and Reporting Books of Accounts and Double Entry
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Formats of the Books of Account

Figure 5.4: General Journal Format

Special Journals
Figure 5.6 : Cash Receipt Journal

Figure 5.7: Cash Disbursment Journal

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Financial Accounting and Reporting Books of Accounts and Double Entry
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Figure 5.8: Sales Journal

Figure 5.9: Purchases Journal

Figure 5.10 The General Ledger and Subsidiary ledgers

Application
Congratulations! You have just completed Topic 1.

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Financial Accounting and Reporting Books of Accounts and Double Entry
System

I prepared some activities for you to refresh your thoughts. These activities are
assessment if you understand that discussions we had. Though this will not be
recorded, it will still form part of your class standing so make sure to accomplish
the tasks given to you. 

The books of accounts

I. Indicate the type of book of accounts that is most relevant to the items
desbribed below:

1. A business purchased supplies on account

2. Sold goods to customers for cash
3. Purchased goods in exchange for a notes payable
4. Purchase equipmet for cash
5. The owner would like to know the amount that he owes to each supplier
II: Discuss briefly the following
a. Discuss the difference between the general jornal and special journals
b. Why do a business owner needs to maintain a subsidiary ledger for some
accounts?

Topic 2: Double Entry System

Time Allotment: 90 Minutes

Learning Objectives:
At the end of this topic, you will be able to:
a. Describe the concepts of double entry system
b. Demonstrate the normal balance of each account
c. Apply the rules of debit and credit

Activating Prior Learning

I. Identifying the normal balances: In each account given in column A,
indicate its normal balance in Column B
A. Accounts B. Normal Balances
1 Liability
2 Asset
3 Expense
4 Income
5 Owner’s Equity

This time, try to assess yourself on how familiar you are about cash and accrual
basis.

How much score did you get?

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Financial Accounting and Reporting Books of Accounts and Double Entry
System

Try to assess your performance based on the given scores and their descriptive
value.
5 - Excellent
3-4 - Good
0-2 - Poor

Congratulations! You did a great job.

Presentation of Content

Double Entry System

All transactions are recorded in the accounting books using the double entry
system. Under this system, each transaction is recorded in two parts, the debit
and credit.
For each amout that is debited , the same corresponding amout should be
credited. This is to maintain the accounting equation to be balanced at all times.
Concepts of Duality and Equilibrum
The double entry system involves the use of the concepts of duality and
equilibrium.
Duality concept – transaction has a two fold effects on values; a value received
and a value parted with. This justifies that every transaction is recorded at least
two accounts
Equilibrum concept – each transaction is recorded in terms of equal debits and
creditd. For every peso debited, there is a corresponding peso credited and vise-
versa
Normal Balances of accounts
The normal balance of an account is the side where it creases when recorded.
The following shows the normal balances of the accounts

Type of account Normal balance

1. Asset Debit
2. Liabilities Credit
3. Equity Credit
4. Income credit
5. Expense Debit

Rules of Debits and Credit

To record an account as debit with a normal debit balance means to increase
that account and to credit it means to decrease it. On the other hand, to credit
an account with a normal credit balance meansto increase that account and to
debit it means to decrease it.
The summary of the rules of debits and credits can be analyze in the table below:

Type of account Normal balance Effect on balance Effect on balance

when Debited when Credited
1. Asset Debit Increase Decrease
2. Liabilities Credit Decrease Increase
3. Equity Credit Decrease Increase

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Financial Accounting and Reporting Books of Accounts and Double Entry
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4. Income Credit Decrease Increase

5. Expense Debit Increase Decrease
Remider: Master the rule of debits and credits and its effect to accounts normal
balances in order to make your accounting course easier

Ending Balance of an Account

The difference between the monetary totals of debits and credits to an accounts
represents the ending balance of that account. The minimum balance of an
account is zero. This occurs when the total debit is equal to the total credits to an
account.
Imagine Figure 5.11 is an asset account

Assets/Expenses
Accounts
Debit Credit
100 40
Normal Ending
balance 60
(Reflected on the
debit side)

Liability/Equity/income Accounts
Debit Credit
150 180
Normal Ending
balance 30
(on the credit side)

Normally, accounts’ ending balances lies on their normal balance side, that is, if
an account’s normal balance is debit, its ending balance must be in the debit side
and vice versa if its normal balance is in the credit side.The same principle
applies when establishing beginning balances because the ending balance of an
account in the current period will become its beginning balance of the next
peiod.
However, there are times that accounts ending balances do not conform with the
ending balance rule, for example an expense credit balance is greater than its
debit balance. This case is known as abnormal balance. This connotes indication
that errors might had been committed . Knowing the fact that expenses normal
balance is debit.

Expense Account
Debit Credit
100 140
Abnormal Ending
balance 40

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Financial Accounting and Reporting Books of Accounts and Double Entry
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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 adjunct account
Contra accounts are presented in the financial satements as deduction to their
related accounts. Thus contra accounts normal balance is opposite to its related
account. That is, if the account has a normal debit balance, its contra accounts
has normal credit balance and vice-versa in the opposite case.
Adjunct accounts are presented in the financial statements as addition to their
related accounts. Thefore, adjunct account has the same normal balance with its
related account, that is, if the account has a credit normal balance, its adjuct
account has also a credit normal balance.

Examples of accounts with contra accounts

Accounts Related Accounts

Accounts Receivable Allowance for bad debts
(Contra account)
Building Accumulated depreciation
(Contra account)

The sum of the balaces of an account and its related account (contra or adjunct)
is called carrying amount or (net carrying amount) of that account.
Example:
On December 31, 2020, the books shows a balance of P100,000 in Accounts
Receivable and it was estimated that P5,000 of the accounts are incollectible and
treated as allowance for bad debts. How much is the carrying amount of the
accounts receivable on December 31, 2020?
Solution:

Accounts receivable P100,000

Less: Allowance for bad
5,000
debts
Net carrying amount P95,000

Application

Congratulations! You have just completed the topics.

I prepared some activities for you to refresh your thoughts. These activities are
assessment if you understand that discussions we had. Though this will not be
recorded, it will still form part of your class standing so make sure to accomplish
the tasks given to you. 
Imagine youself facing a mirror with both arms raised sideways to shoulder level.
Aswer the following questions
1. Your left arm is
A. Debit
B. Credit

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2. If you would be an asset, how would you be increase?

A. Through my left arm
B. Through my right arm
3. If you were a liability, how would you decrease?
A. Through my left arm
B. Through my right arm
4. If you kick your right foot to touch your right hand, what happens?
A. Addition
B. Subtraction
5. If you clap your hands what happens?
A. Addition
B. Subtraction

Feedback
Name: _________________________ Section: ____________ Score:_______
I. Identification (Rules of Debit/Credit)
Instruction: Indicate how the accounts listed below are increased. (Debit or
Credit)
Accounts Increase by (Debit/Credit)
1. Accumulated Depreciation
2. Sales
3. Inventory
4. Notes Payable
5. Insurance expense
6. Allowance for bad debts
7. Interest income
8. Equipment
9. Allowance for inventory
write down
10. Intangible asset
11. Depreciation
12. Owner’s Capital
13. Owner’s withdrawal
14. Unearned Revenue
15. Accounts Receivable

II. Identification: Books of accounts

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Instruction: Indicate the books of account that is most relevant to the

items described below:
1.Purchase of inventory in Cash basis
2.Collection of accounts receivable
3.Acquisition of land on cash basis
4.This is the book of original entry
5.This book of accounts shows the balances of controlling accounts
6.Payments of accounts payable
7.Sales on account
8.Collection of interest income
9.Recognition of depreciation expense
10. Receipt of utility bills to be settled next weed

III. In column A, indicate whether the account is Asset, Liability, Equity, Income
or Expense. In column B, indicate the normal balance of the account

Account A: (Account Classification) B: Normal Balance

1. Utilities Payable
2. Advances from
cusromers
3. Inventory
4. Equipment
5. Salaries Expense
6. Sales
7. Cash
8. Owner’s capital
9. Notes receivable
10. Owner’s Drawing
11. Depreciation
12. Store Supplies
13. Building
14. Interest Payable
15. Gains

IV. Multiple Choice

1. Which of the following statements is incorrect regarding the use of the books
of accounts?
a. If an entity uses special journals, its sales on account are recorded in the
sales journal, while its sales on cash basis are recorded in the cash
receipts journal.
b. If an entity uses special journals, it will record only purchases on account
in the purchases journal. It will not record cash purchases and purchases
in exchange for notes payable in the purchases journal.
c. If an entity uses special journals, all transactions that cannot be recorded
in the special journals are recorded in the general journal.

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d. All the accounts in the general ledger have supporting accounts in the
subsidiary ledger.

2. Journals are used in a recording process called

a. posting.
b. journalizing.
c. journalizationing.
d. postinging.

3. Which of the following is not a special journal?

a. Sales journal
b. Cash receipts journal
c. Purchases journal
d. Subsidiary ledger

4. An increase to an account is recorded

a. in the debit side of that account.
b. in the credit side of that account.
c. in the side of that account that represents its normal balance.
d. beside the account.

5. When two debits get together, the result is

a. addition.
b. deduction.
c. multiplication.
d. love and happiness.

6. Cash is increased through

a. a debit.
b. a credit.
c. ask Mama to make padala.
d. a and c

7. The minimum balance of an account is zero. In accounting, a negative

balance in an account is referred to as
a. abnormal balance.
b. crazy balance.
c. psychotic balance.
d. LOL balance.

8. At the beginning of the period, a business has a cash balance of ₱20,000.

During the period, total cash collections and total cash payments amounted
to ₱100,000 and ₱70,000, respectively. How much is the ending balance of
cash?
a. 10,000
b. 30,000
c. 50,000
d. 70,000

9. You opened up a business and invested ₱5M cash as the business’ initial
capital. Which of the following accounts is increased and therefore debited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Accounts receivable

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Financial Accounting and Reporting Books of Accounts and Double Entry
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10. In conjunction with the transaction in #9 above, which of the following

accounts is also increased and therefore credited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Accounts receivable

11. You purchased goods to be held for sale in the ordinary course of business
activities, on cash basis. Which of the following accounts is increased and
therefore debited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Inventory

12. In conjunction with the transaction in #11 above, which of the following
accounts is decreased and therefore credited?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Inventory

13. If the transaction in #11 above was made on account, which of the following
accounts is also increased and therefore credited?
a. Cash
b. Accounts receivable
c. Accounts payable
d. Inventory

14. A customer bought goods from your business, on credit. The customer orally
promised to pay the sale price next week. Which of the following accounts is
increased and therefore debited?
a. Cash
b. Accounts receivable
c. Notes receivable
d. Sales

15. In conjunction with the transaction in #14 above, which of the following
accounts is also increased and therefore credited?
a. Cash
b. Accounts receivable
c. Notes receivable
d. Sales

16. When the customer in #14 above pays the sale price, which of the following
accounts is decreased and therefore credited?
a. Cash
b. Accounts receivable
c. Inventory
d. Sales

17. Your business obtained a ₱1M loan from a financing company. The financing
company made you sign a contract promising to repay the loan after a year.
Which of the following accounts is increased and therefore credited?
a. Accounts payable
b. Accounts receivable
c. Notes payable

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Financial Accounting and Reporting Books of Accounts and Double Entry
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d. Notes receivable

18. To record the transaction in #17 above, which of the following accounts will
you debit?
a. Cash
b. Accounts payable
c. Owner’s equity
d. Inventory

19. The financing company who lent you the loan in #17 above will record the
transaction by debiting which of the following accounts?
a. Accounts payable
b. Accounts receivable
c. Notes payable
d. Notes receivable

20. The financing company in #17 above will credit which of the following
accounts?
a. Cash
b. Accounts receivable
c. Notes payable
d. Notes receivable

21. You purchased a computer for ₱50,000 cash. To record this transaction,
which of the following accounts will you credit?
a. Cash
b. Computer equipment
c. Owner’s capital
d. Inventory

22. You expect to use the computer in #21 above over the next 5 years. At the
end of Year 1, you will debit which of the following accounts?
a. Depreciation expense for ₱50,000
b. Depreciation expense for ₱10,000
c. Accumulated depreciation – Equipment for ₱50,000
d. Accumulated depreciation – Equipment for ₱10,000

23. Which of the following statements is correct?

a. A contra-asset account is increased through credit.
b. Accounts receivable is increased through credit.
c. Owner’s equity is increased through debit.
d. Accounts payable is decreased through credit.

24. The “Allowance for bad debts” account is a contra account of

a. Cash.
b. Building.
c. Accounts receivable.
d. Equipment.

25. Entity A’s accounts receivable has a balance of ₱10,000. If the related
allowance for bad debts account has a balance of ₱4,000, the carrying
amount of accounts receivable in Entity A’s financial statements is
a. ₱14,000.
b. ₱6,000.

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Financial Accounting and Reporting Books of Accounts and Double Entry
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c. ₱4,000.
d. 0.

Reflection

This part of the module will be a time for you to look back, and reflect on what
you have learned from this unit. Though, this will not be checked and recorded, I
would appreciate if you will do this wholeheartedly and with all seriousness.

Your task!
Open your phone camcorder and imagine that you are a tutor of your other self. Record
yourself as you try to recall the normal balances of each account and state whether it
increases or decreases when debited or credited. During your free time, play the video
oftentimes until you master its content..

Unit Summary
In this unit, we discussed:

 The two types of boof of accounts , the journa na d the ledger.

 Business transaction are first recorded in the journal
 The effects of the transaction to specific account are posted to the ledger
 Special journals are used to records recurring transactions that are
similar in nature. Transactions that cannot be recorded in the special
journal is recorded in the general journal
 The general ledger contains all the accounts appearing in the trial
balance
 The subsidiary ledger provides breakdown of the controlling accounts in
the general ledger
 Under the double entry system, accounts are recorded in two parts, debit
and credit
 Assets and expenses have normal debit balances while liabilities, equity
and Income have a credit normal balances
 Normal balance is where accounts increases . For assets and expenses,
debit means to increase and credit is to decrease. While liability, equity
and income, debit means to decrease and credit means to increase
 Debit and debit as well as credit and credit result to addition
 Debit and credit or vice-versa result to deduction
 A contra account is deducted from its related account when computing
for the carrying amount of the related account. On the other hand, an
adjunct account is added to its related account.

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Financial Accounting and Reporting Books of Accounts and Double Entry
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