Fundamentals of Accounting 1 (ACC1) Page 1 of 8

WEEK 3: The Mechanics of Accounting Process

Week 3: The Mechanics of Accounting Process

III. LESSON PROPER:

3.1 Lesson 1: The Journal

Financial statements are key goals of the accounting process. In order to prepare
them at the end of an accounting period, individual financial transactions must be
analyzed, classified, and recorded all throughout the period. This initially takes place in a
record book called the journal, where financial events called transactions are recorded
as they happen, in chronological order.

When a transaction occurs, two or more accounts are affected. There is also a dollar
amount associated with each of the accounts. Determining which accounts are impacted,
and by how much, is the first step in making a journal entry.

This is a sample of a few rows in a journal. It has five columns: Date, Account, Post.
Ref., Debit, and Credit

Date Account Post. Debit Credit

Ref.

In the journal, the column heading Debit means “left” and Credit means “right.” There
are other familiar interpretations of these words, so don’t be confused: the terms here
only have to do with whether a dollar amount is entered in the left or the right number
column.
These words may also be used as verbs: To “debit an account” means to enter its amount
in the left column. To “credit an account” means to enter its amount in the right column.

3.2 Lesson 2: Rules of Debit and Credit

Whether a particular account should be debited or credited is based on (1) the type
of account it is and (2) whether the account is increasing or decreasing.
Fundamentals of Accounting 1 (ACC1) Page 2 of 8
WEEK 3: The Mechanics of Accounting Process

3.3 Lesson 3: Journalizing Transactions

We now will come to one of the most important procedures in the recordkeeping
process: journal entries. It involves analyzing and writing down financial transactions in
a record book called a journal. Financial events are evaluated and translated into the
language of accounting using the process of journalizing.
Select two accounts and, according to the rules of debit and credit for cash, revenue,
and expense accounts, decide which account to debit (left column) and which to credit
(right column). The debit entry is always listed first. No peso signs are required in the
journal.
Journalizing involves the following steps:
1. Select two (or more) accounts impacted by a transaction.
2. Determine how much, in pesos, each account is affected. Oftentimes the amounts are
given; other times the amounts must be calculated based on the information provided.
3. Based on the rules of debit and credit, decide which account(s) is debited and which is
credited.
4. Enter the date on the first line of the transaction only.
5. Enter the account that will be debited on the first line of the transaction. Enter its amount
in the Debit column on the same line.
6. Enter the account that will be credited on the second line of the transaction. Enter its
amount in the Credit column on the same line.
NOTE: Indent the credit account name three spaces.
Fundamentals of Accounting 1 (ACC1) Page 3 of 8
WEEK 3: The Mechanics of Accounting Process

SAMPLE TRANSACTION #2:

On 9/5, a customer paid P950 cash for services the company provided.

In practice, each transaction follows immediately after the previous one, as shown here.
Date Account Debit Credit
9/1 Rent Expense 9,000
Cash 9,000
9/5 Cash 950
Fees Earned 950
9/8 Wages Expense 600
Cash 600
9/10 Cash 700
Fees Earned 700
Fundamentals of Accounting 1 (ACC1) Page 4 of 8
WEEK 3: The Mechanics of Accounting Process
The same journal continues on from period to period. You do not start a new journal
for a new accounting period (month or year).

3.4 Lesson 4: Ledger

The ledger is the second accounting record book that is a list of a company’s individual
accounts list in order of account category. While the journal lists all types of transactions
chronologically, the ledgers separate this same information out by account and keep a
running balance of each of these accounts.
Each account has its own ledger page. The account name appears across the top.
The ledger form has six columns: Date, Item, Debit, Credit, Debit, Credit. The first set of
Debit and Credit columns are where amounts from the journal transactions are copied.
The second set of Debit and Credit columns are where the account’s running total is
maintained. An account’s running balance typically appears in either the Debit or the
Credit column, not both.
The following is a sample ledger for the Cash account.
Cash
Date Item Debit Credit Debit Credit
6/1 12,000 12,000
6/2 2,000 14,000
6/3 3,000 11,000

Copy amounts BALANCE

from journal columns (use
(use either one of the two)
column)
IMPORTANT:
Information entered in the ledger is always copied from what is already in the
journal.
3.5 Lesson 5: Posting
The process of copying from the journal to the ledger is called posting. It is done
one line at a time from the journal. Here are step-by-step instructions for doing so.
1. Take note of the account name in the first line of the journal. Find that ledger account.
2. Copy the date from the journal to the first blank row in that ledger.
3. Leave the Item column blank in the ledger at this point.
4. Take note of the amount on the first line of the journal and the column it is in.
5. Copy that amount to the same column in the ledger on the same line where you
entered the date.
6. Update the account’s running balance. Take note of the previous balance in the last
two columns of the ledger, if there is one. Do one of the following, based on the
situation.
Fundamentals of Accounting 1 (ACC1) Page 5 of 8
WEEK 3: The Mechanics of Accounting Process
a. If there is no previous balance and the entry is a Debit, enter the same amount in
the Debit balance column.
b. If there is no previous balance and the entry is a Credit, enter the same amount
in the Credit balance column.
c. If the previous balance is in the Debit column and the entry is a Debit, add the
two amounts and enter the total in the Debit balance column.
d. If the previous balance is in the Debit column and the entry is a Credit, subtract
the credit amount from the balance and enter the difference in the Debit balance
column. *
e. If the previous balance is in the Credit column and the entry is a Credit, add the
two amounts and enter the total in the Credit balance column.
f. If the previous balance is in the Credit column and the entry is a Debit, subtract
the debit amount from the balance and enter the difference in the Credit balance
column. *
* Note: The only exception to the above is the rare occasion when one of the
calculations above results in a negative number. No negative amounts should appear in
the ledgers. Instead, the balance will appear in the opposite balance column.
7. Go back to the journal and enter an “x” or checkmark in the PR column to indicate
that you have posted that line item.
8. Repeat the process for the next line in the journal.
Every time an account appears on a line in the journal, its amount is copied to the
proper column in that account’s ledger. A running total is maintained for each account
and is updated every time an amount is posted.
The example that follows shows a journal with five transactions that involve Cash.
On each row where Cash appears in the journal, the amount on the same line is copied
to the same column in the Cash ledger, in either the first Debit or the first Credit column.
Superscripts are used here to match each Cash amount in the journal to its posting in the
ledger. For example, the first debit to Cash in the journal for P6,000 is copied to the debit
column in the ledger (#1). The next time Cash appears in the journal is a credit for P2,000,
so that is copied to the first credit column in the ledger (#2).
Fundamentals of Accounting 1 (ACC1) Page 6 of 8
WEEK 3: The Mechanics of Accounting Process

As shown in the previous example, the first entry in the ledger indicates which of the
two final columns will normally be used to maintain the accounts running balance. For the
Cash account, the first entry is in the first Debit column, so the running balance begins
accumulating in the second Debit column. On the first row, the amounts in the two Debit
columns will be the same. In this case, the amount is P6,000 in both. After the first entry
in the ledger, subsequent debit entries are added to the previous debit balance, and
subsequent credit entries are deducted from the previous debit balance.

GETTING THE JOB DONE:

You can go to an ATM to withdraw cash from your checking account. The first steps
are to insert your debit card into the ATM machine and select the amount you would like
to receive. If that is all you do, no money will come out no matter how long you stand
there. In order to get the job done, you also need to enter your PIN. The goal is to withdraw
cash, and if you do not complete that step, it is not going to happen.
Similarly, there is a goal to prepare the journal and ledgers – to maintain a running
balance of each account your business has. If you enter a transaction in the journal, you
are off to a good start, but if you don’t complete the step of posting the journal entry to
the ledgers, the correct balances are not going to happen.
3.6 Lesson.6: Normal Balance
The last two Debit and Credit columns in the ledger are where a running total
(balance) is maintained for each account. An account’s running balance will accumulate
in EITHER the Debit balance column OR Credit balance column (two far right columns),
but rarely both. The normal balance is also whatever it takes to increase that type of
account, either Debit or Credit. The normal balance for an account is the column in
which its running total is maintained. An example of a journal and ledgers follows. Try to
follow how the numbers from the journal on the left appear in the ledgers on the right
and how the running balances in the ledgers are determined.
Fundamentals of Accounting 1 (ACC1) Page 7 of 8
WEEK 3: The Mechanics of Accounting Process

The first entry in each ledger, either Debit or Credit, dictates whether the running
balance will appear in the Debit or the Credit balance column. If the first entry is a Debit,
the running balance accumulates in the Debit balance column. A debit is the “positive” for
this type of account; any subsequent debit entries are added and credit entries are
subtracted from the running balance. Conversely, if the first entry is a Credit, the running
balance accumulates in the Credit balance column. A credit is the “positive” for this type
of account; any subsequent credit entries are added and debit entries are subtracted from
the running balance.
The grayed column above in each ledger represents the balance column that will
normally remain blank.
The total of all the Debit balances in the ledgers MUST EQUAL the total of all the
Credit balances in the ledgers. If this is not the case, there is a recording error that must
be located and corrected. In the example above, the ledgers balance: 3,000 + 900 (debit
balances) = 3,900 (credit balance).
Fundamentals of Accounting 1 (ACC1) Page 8 of 8
WEEK 3: The Mechanics of Accounting Process
The same ledgers continue on from period to period. You do not start new ledgers for
a new accounting period (month or year).
To summarize the two record books, the journal first records all types of transactions
chronologically, in time sequence order. The ledgers separate the same information out
by account and keep a balance for each of these accounts.
IMPORTANT: If you are making entries in the ledgers, you must be COPYING from the
journal.
3.7 Lesson 7: Trial Balance
The total of all the debit balances in a company’s ledger accounts must always equal
the total of all the credit balances. A trial balance is a list of all a business’s accounts and
its current ledger balances (copied over from the ledger accounts). A trial balance may
be generated at any time to test whether total debits equals total credits. It is simply a
worksheet to check for accuracy before preparing financial statements. If both of the Total
columns do not equal, there is an error that must be found and corrected.
The example that follows is for a company with only four accounts. The trial balance
on the left lists these accounts and their corresponding balances at the end of the month,
which are copied over from the ledgers on the right.
TRIAL BALANCE
June 30, 2018
Account Debit Credit
Cash 3,000
Common Stock 2,000
Fees Earned 1,900
Supplies Expense 900

TOTAL 3,900 3,900