Journalizing Economic Transactions ABM Students Edition

While it seems like the accounting cycle is a difficult thing to do when you are just starting to learn it, embrace your fear and take steps to overcome it. With constant practice, you will soon master it. Just believe in yourself.

In this page, we will discuss Steps 1 and 2 of the Accounting Cycle. So at the end of this article, it is expected that you will learn how to identify events that need to be recorded, and how to journalize or record such events.

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Step 1: Identification of Events to be Recorded

The first step in the recording process is the identification of economic events that need to be recorded. Whether it is a financial transaction, a business operation, or any other event, proper identification ensures accuracy and completeness in the records.

Important thing to remember: Only those that affect the accounting equation can be recorded.

To recall, the accounting equation consists of assets, liabilities and equity. The formula is:

Assets = Liabilities + Equity

This means that when the transaction do not affect the accounting equation, do not make a journal entry. Instead, make a memo entry. A memo entry is just a statement about the transaction.

For example: Company A hires B as the new Secretary. Her salary is 15,000 a month.

Does the above event need to be journalized? The answer is no. You cannot debit Salaries Expense nor credit cash because the event is merely a statement showing the newly hired secretary.

In this case, use a memo entry like this:

Memo Entry: A new secretary is hired with a salary of 15,000 per month.

This will not affect the ledger or trial balance, but it is important to know it.

Also read: The Rules of Debit and Credit

Step 2: Transactions are Recorded in the Journal

After analyzing the impact of the transactions, the next step is recording them in a journal. A journal is a form where we can find the chronological record of transactions that took place involving the company.

As previously stated, only record the transaction if it affects the accounting equation. 

To understand it better, here are some examples.

Gaget Company is a business that conducts tutoring services. The following transactions were completed during the month of August, 2023, the first month of operations:

• August 1 Gaget invested P100,000 personal funds in a new bank account in the name of the new company.
• August 2 Bought a computer for office use from Computer Company, P30,000. Terms: 50% downpayment, balance payable after 60 days.
• August 3 Acquired office supplies on account, P5,000 from Supplies Company.
• August 4 Performed tutoring services to various customers and sent a bill of P28,000 for the tutoring services.
• August 6 Received P28,000 from various customers for the tutoring services rendered.
• August 8 Hired a personal assistant. The salary of the new assistant is 8,000.
• August 10 Paid in full the balance of the account to Supplies Company.
• August 12 Bought additional supplies for cash, P2,000.
• August 15 Rented a new space for office use and paid P15,000 rent for five months in advance.
• August 20 Paid miscellaneous expense, P500.
• August 24 Billed Client for tutoring service rendered for two weeks, P14,000.
• August 25 Received and paid electric bill, P1,125.
• August 28 Received water bill, P250.
• August 31 Received partial payment from Client B, P10,000.

Journalize transactions

August 1: Gaget invested P100,000 personal funds

Date	Account Title & Explanation	Debit	Credit
August 1	Cash	100,000
	Sanaol Capital		100,000

Gaget invested P100,000 of personal funds into the business. This increases the company's cash and also increases the owner's equity in the business.

August 2: Bought a computer for office use

Date	Account Title & Explanation	Debit	Credit
August 2	Computer	30,000
	Cash		15,000
	Accounts Payable		15,000

The company purchased a computer worth P30,000. Gaget paid 50% and that is P15,000 (30,000*50%). The remaining half which is P15,000, will be paid in 60 days.

August 3: Acquired office supplies on account

Date	Account Title & Explanation	Debit	Credit
August 3	Office Supplies	5,000
	Accounts Payable		5,000

The company acquired office supplies worth P5,000 on credit. This increases the company's office supplies and also increases its liabilities, particularly accounts payable because the supplies were purchased on account, which means on credit.

August 4: Performed tutoring services and sent a bill

Date	Account Title & Explanation	Debit	Credit
August 4	Accounts Receivable	28,000
	Service Revenue		28,000

The company provided tutoring services and billed customers P28,000. This increases the company's receivables and also increases its revenue. 

August 6: Received payment for tutoring services

Date	Account Title & Explanation	Debit	Credit
August 6	Cash	28,000
	Accounts Receivable		28,000

The company received payment from customers for the tutoring services previously billed in August 4. Since nakatanggap ka ng cash, syempre tataas ang amount ng cash kaya ide-debit mo siya. At the same time, bababa na rin ang receivable mo kasi natanggap mo na ang bayad. Dahil diyan, you have to credit accounts receivable. 

Tip para hindi malito: Kung tumaas ang isang asset account, debit. Kung bumaba ang isang asset account, credit.

In the given transaction, one asset increases, and at the same time, another asset decreases. This is also called the exchange of assets. Normally, wala siyang change in total assets since tumaas yung is a at bumaba naman ang is a pa. In effect, zero ang change.

August 8: Hired a personal assistant

The company hired a personal assistant with a salary of P8,000. This is an administrative action and does not result in a financial transaction on this date. 

Memo Entry: Hired a personal assistant with a salary of P8,000.

August 10: Paid in full to Supplies Company

Date	Account Title & Explanation	Debit	Credit
August 10	Accounts Payable	5,000
	Cash		5,000

The company paid the P5,000 owed to Supplies Company. This decreases the company's liabilities and also decreases its cash.

Balikan mo lang ang transaction sa August 3. Nasa credit side and accounts payable mo doon and that signifies na tumaas siya dahil umutang ka. In this date, August 10, binayaran mo na ang utang. Therefore, mababawasan ngayon ang utang mo or yung payable mo kaya ide-debit mo naman siya ngayon. Since nagbayad ka, mababawasan din ang cash mo kaya ire-credit mo naman ang cash.

August 12: Bought additional supplies for cash

Date	Account Title & Explanation	Debit	Credit
August 12	Office Supplies	2,000
	Cash		2,000

Gaget purchased additional office supplies worth P2,000 and paid in cash. Office supplies was increased so you have to debit it. On the other hand, nabawasan ang cash so you have to credit it.

August 15: Rented a new space for office use

Date	Account Title & Explanation	Debit	Credit
August 15	Prepaid Rent	15,000
	Cash		15,000

The company paid P15,000 rent for five months in advance for a new office space.

This is a prepayment. An adjusting entry may be made at the end of the month. But that will be discussed in a separate discussion.

August 20: Paid miscellaneous expense

Date	Account Title & Explanation	Debit	Credit
August 20	Miscellaneous Expense	500
	Cash		500

The company paid P500 for miscellaneous expenses. Tumaas ang expenses mo so you have to debit it. Cash, on the other hand, ay bumaba naman kaya siya credited.

August 24: Billed Client for tutoring service

Date	Account Title & Explanation	Debit	Credit
August 24	Accounts Receivable	14,000
	Service Revenue		14,000

The company provided tutoring services for two weeks and billed the client P14,000. The word billed means hindi pa nabayaran. Dito, tumaas ang accounts receivable mo kaya siya debited. Service revenue was increased naman because you have already performed the service. You earned it already. 

August 25: Received and paid electric bill

Date	Account Title & Explanation	Debit	Credit
August 25	Utilities Expense-Electricity	1,125
	Cash		1,125

The company received and paid an electric bill amounting to P1,125. 

August 28: Received water bill

Date	Account Title & Explanation	Debit	Credit
August 25	Utilities Expense-Water	1,125
	Accounts Payable		1,125

The company received water bill so you have to debit utilities expense-water. At the same time, credited naman ang accounts payable dahil hindi mo pa nababayaran.

Just in case it was mentioned in the transaction na sumulat ng promissory note, Notes Payable ang gagamiting account title instead of Accounts Payable.

August 31: Received partial payment from Client B

Date	Account Title & Explanation	Debit	Credit
August 31	Cash	10,000
	Accounts Receivable		10,000

Although it is a partial payment lang, there is still an effect that needs to be recorded. Debit cash for the amount received and credit accounts receivable to decrease the receivable.

Sample Problem to Try

There you have it. I hope you learned something new. Here are a few transactions. Can you journalize them? Write the answers below.

• Performed services to various customers and sent a bill of P20,000 for the services rendered.
• Received 80% of the account previously charged to various customers for the tutoring services rendered.
• Hired a secretary. The salary of the new secretary is 10,000.
• Sold a dozen of pencils to A. Terms: 2/10, n/30.
• Received payment from A 9 days after the sale.