MODULE 10: BOOKEEPING

Lesson 1: Perform Bookkeeping Tasks

What is Bookkeeping?

- Is the process of recording business transactions in a systematic and chronological manner.

- It is systematic because it follows procedures and principles. On the other hand, it is chronological
because the transactions are recorded in order of the date of occurrence.
- Bookkeeping is the starting point of the accounting process. A sound bookkeeping system is the
foundation for gathering the information necessary to answer questions related to profitability,
solvency and liquidity of the business.

What is a Bookkeeper?

- Each business has a bookkeeper who is in-charge to record, maintain and update business records
from all sorts of financial transactions using account title that can be found in the charts of accounts
already set up by the Accountant.
- The bookkeeping function dictates the bookkeeper to keep track of all financial transactions of the
business. Only transactions that has monetary value will be recorded.
- The bookkeeper uses the Book of Accounts to record the business transactions which is to be
consolidated later to help construct financial statement such as the Trial Balance, Income Statement
and Balance Sheet.

What is a Book of Account?

- The book of accounts are composed of the Journal and Ledger. It depends on the type of business,
some businesses used special journals when they are engaged merchandising type of business to
records business transactions. This module will cover and provide example for service oriented
business. Thus, only journal and ledger will be used in the succeeding examples

There are two types of books used in recording business transactions. They are called journals and
ledgers. Journal refers to the book of original entry while the Ledger refers to the book of final entry.

What is a General Journal?

- The general journal is the most basic journal which provides columns for date, account titles and
explanations, folio or references and a separate column for debit and credit entries. Depicted in
figure 1 below is a sample format of a general journal:
What is a General Ledger?

- The general ledger is a grouping of all accounts directly traceable to chart of accounts. These
accounts will be reflected in the financial statements as a summary of all financial activities that have
taken place as recorded in the general journal and subsidiary ledgers. Depicted in figure 2 below is
a sample format of a general ledger:

What is a Subsidiary Ledger?

- The subsidiary ledger is a group of accounts directly associated from the general ledger. This record
is created to maintain individual accounts for customers and vendors whose cash is not being used
as a medium of exchange when purchasing or selling merchandise. Depicted in figure 3 and 4 below
is a sample format of a subsidiary ledgers Accounts Receivable and Accounts Payable respectively:

The Rules of Debit and Credit

- In the process of journalization, following the rules of Debit and Credit are essential part to ensure
accurate recording and sound decision making. Debit is abbreviated as DR while CR for Credit. It is
a requirement that the bookkeeper is able to master the normal balance of each account title before
performing the tasks of bookkeeper.
When to Debit?

When cash or non-cash items are received, the said cash or non-cash items must be recorded in the
debit column. This means that the debit balance increased. It is called Value Received.

When to Credit?

When cash or non-cash items are given, the said cash or non-cash items must be recorded in the
credit column. This means that the credit balance is increased. It is called Value Parted With.

The following steps will be undertaken in determining account balances for every
account title such as cash, account receivable, etc.:
1. Add all the debit side to generate total debit
2. Add all the credit side to generate total credit.
3. Subtract total debit to the total credit.
4. Determine the balance of each account.

In order to fully understand the concept of debit and credit balances, depicted in figure 6 below is a
matrix of normal debit and credit balances under each of the five major accounts:
 Trial Balance

- Trial balance is a list of all ledger accounts with closed or final balances on a certain period arranged
according to the rules of debit and credit. The debit and credit columns must be equal in total amount.
This is the first report prior to financial statement preparation. Depicted in figure 7 below is a sample
format of a trial balance report with peso amount.

What is an Adjusting Entry?

Making an adjusting entry helps the bookkeeper capture all financial events happened over a period
of time within the accounting cycle. It is essential in keeping the financial record updated. The
bookkeeper is going to look or examine accounts that needs to be updated. Outlined below are the
five basic sources of adjusting entries:

1. Depreciation expense
 2. Deferred expenses of prepaid expenses
3. Deferred income of unearned income
4. Accrued expenses of accrued liabilities
5. Accrued income or accrued assets

1. Depreciation.

This is a method of allocating the cost of an asset to an expense over the accounting periods that
make up the asset’s useful life. Examples of assets subject to depreciation are: Store, Office, Building,
and Transportation equipment. These types of assets lose their ability to provide useful service as
time passes. Depreciation can also be referred to as the decrease in the usefulness of these types of
assets. Take note that Land is not subject to depreciation because the value of land mostly increases
as time passes.

There are several methods or formulas to compute the amount of depreciation. The simplest is the
straight line method.

Illustrative problem:

The cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is
estimated that after five years, the office equipment can be sold at a scrap value of PHP1,000. To
compute for the monthly depreciation, just divide the annual depreciation by 12. One year is composed
of 12 months.
The depreciation expense is an allocated for all sixed assets except land. Example
are building, equipment and or machineries that the business is using to generate
income. It shall be reported as an expense account in the income statement directly
attributable in the said fixed assets. While the accumulated depreciation is a balance
sheet account but treated as a contra-account to the concerned fixed asset.

Refer to the illustration below:

2. Deferred expenses or prepaid expenses.

These are items that have been initially recorded as assets but are expected to become expenses
over time or through the operations of the business. In order to recognize the correct amount of
expenses, prepayments shall be amortized weekly, semi-monthly or monthly, depending on its nature
and purpose.

Illustrative problem:

Purchased P5,000 worth of office supplies on account. By the end of the month, PHP2,000 worth of
these supplies are still unused.

The supplies expense is an income statement account, while the supplies which is now credited is an
asset account. All asset has a normal debit balance. Considering that the supplies in this record is
credited, This will be deducted to the supplies account in the balance sheet to generate the remaining
balance in supplies.
3. Deferred income of unearned income

These are items that have been initially recorded as liabilities but are expected to become income
over time or through the operations of the business.

Illustrative problem:

On February 15, 2016 Matapang entered into a contract with Makisig to maintain the computers of
Makisig for two months starting on February 15, 2016 up to April 15, 2016. On the same date, Makisig
paid the total contract amount of PHP40,000 in full. The entries to record and adjust the books are: In
the February 29, 2016 entry above, as of end of February 2016, Matapang has already earned the
service revenue for the first 15 days, thus an adjusting entry is recorded.

4. Accrued expenses of accrued liabilities

These are items of expenses that have been incurred but have not been recorded and paid.

Illustrative problem:

On February 29, 2016, Matapang received the electric bill for the month of February amounting to
PHP3,800. Matapang will pay this bill on March 2016. The electric bill represents the cost of electricity
used (or incurred) for February. Although the said bill is still unpaid and thus was not recorded, the
matching principle and accrual basis of accounting dictates that the same should be recorded in
February. Otherwise, your expense will be understated and thus the company will be reporting an
overstated income (or an erroneous income). Needless to say, erroneous information may lead to
wrong decisions. The entry to record the accrual of this expense is:
5. Accrued expenses of accrued liabilities

These are income items that have been earned but have not been recorded and paid by the customer.
In short, these are receivables of the business.

Illustrative problem:

On February 28, 2016, Matapang repaired the computer of Pedro for PHP15,000. Pedro was on an
out-of-town trip so he could not pay Matapang. He told Matapang that he will pay for their services on
March 1, 2016. Matapang has already earned the PHP15,000 but was not paid as of the end of
February 2016. Therefore, an income should be properly recognized in February 2016 for this
transaction. The entry to record this is: