Business Transactions and Their Analysis as

applied to the Accounting Cycle of a

Service Business

PREPARED BY : PROF. JONAH C. PARDILLO

 LEARNING OBJECTIVES

At the end of this lesson, the learner should be able to:

 Describe the nature and give examples of business transactions

 Identify the different types of business documents

 Analyze common business transactions using the rules of debit and credit

 Solve simple problems and exercises in the analyses of business transactions

 Accounting Cycle

 Phase 1: The recording and classifying process;

 Phase 2: The summarizing and reporting process; and

 Phase 3: The closing process

Phase 1 – Recording and Classifying Process

Steps 1: Compile and arrange the source documents that support the business
transactions.

Steps 2: Analyze the business transactions and determine their two-fold effects
on the accounting elements.

Steps 3: Journalize the business transactions in the books of original entry called
journals.

Step 4: Post the journal entries to the books of final entry called ledgers.

Step 5: Prepare the adjusted trial balance.

 Phase 2: Summarizing and Reporting
Process
Step 6: Gather the data needed to adjust the accounts

Step 7: Prepare the worksheet.

Step 8: Journalize and post the adjusting entries.

Step 9: prepare the financial statements and supplementary schedules.

 Phase 3: Closing Process

Step 10: Journalize and post the closing entries.

Step 11: Rule and balance the ledger accounts.

Step 12: Prepare the post-closing trial balance.

Step 13: Journalize and post the reversing entries.

 Recording and classifying Process

File of source Analyze the Journalize Post in books

Documents Business in books of of Trial Balance
transactions original entry final entry

Phase 1 of the Accounting Cycle

 Monetary vs. Non-Monetary
Transactions

 Non-Monetary transactions are assigned equal-to-cash peso values or fair

market peso values that are agreed upon between the parties involved, as
evidence by the business papers called supporting documents.

o A machine was acquired in exchange for a delivery truck

o A computer was received as payment for the services rendered to a customer.

o A piece of land was acquired by a corporation in exchange for shares of capital

stock.

o Bonds were issued to pay for newly constructed building.

 Business Transactions

 All business enterprises become a party, directly or indirectly, to various financial

activities or events. These activities and events that occur during a given period of
time, if they affect the business’ financial condition and are capable of being assigned
monetary values.

 Events that affect the financial condition of the business such as fire, theft, typhoon,
accidents, and bankruptcy, are also considered as business transactions from the point
of view of accounting.
 External vs. Internal Transactions

 Business transactions that involve exchanges of economic consideration with another separate
entity, whether a natural or an artificial entity, are referred to as external business transactions.

o Purchased equipment

o Rendered services to the customers or clients

o Took a loan from the bank

o Paid bonuses to the employees

o Used the property of a lessor.

o The stockholder received dividend on his investment

o The proprietor made an additional investment in the business.

 Internal Business transactions

 Internal business transactions are activities or events that occurred within the business
enterprise with no separate entity involved. Some examples of internal business transactions
are:

o Used raw materials to produce the finished gods

o Allocated the rent of the building between the administrative and sales departments

o Transferred the finished goods from the factory floor to the storeroom

o The office burned down

o Discarded the spoiled supplies

 Analyzing the two-fold-effects of
business transaction
 The following questions may arise:
o What financial activity or event happened?

o Are there reliable source documents that would objectively support the business
transactions?

o Who is the other party (or person) involved in the business transactions?

o Which specific accounting, elements in the accounting equations are affected by the
business transaction?

o What specific account titles are suitable to use for each accounting element that is
affected by the business transaction?
 Cont..

 The following questions may arise:

o Which account balances increased or decreased as a result of the transaction?

o Can reliable and objective monetary values be assigned to the specific account
titles that are affected by the transaction?
 Sources of Documents

 It is necessary that the reported information can be easily traced back to the
supporting evidences. Therefore, it is important that all source documents are
properly prepared, compiled, and controlled.

 Source of documents coming from independent outside parties are considered as

neutral and more objective evidences of transactions than those coming from within
the business enterprise.

 Source documents are recorded in the books of accounts, they are sorted, arranged
and filed, either according to their chronological dates or their numerical order.
 Sample of supporting documents
Official receipts Statements of accounts Minutes of meetings
Disbursement vouchers Bills Registration papers
Charge sales invoices Bank passbook Approved journal
vouchers
Cash sales invoices Bank statements Etc..
Delivery receipts Validated deposit slips
Purchase or letter of orders Bank withdrawal form
Requisition forms Debit and credit memoranda
IOUs Time records
Promissory notes Payroll slips
Drafts Payroll sheets
Stock certificates Contracts
Memoranda of agreement Business letters
Parties involved in the Business
Transactions

Transaction First party Second party

Sold services for cash Server, provider, or Buyer, client, or
supplier customer
Sold goods or services Seller, supplier, or Buyer, customer, or
on account or credit creditor debtor
term
Loan was Lender, investor Borrower, investee
granted/taken
 Two-fold Effects of the Business
Transactions
 Under double-entry bookkeeping system, it is necessary that an accountant have the
skill to determine which elements are affected by a business transactions and the
effect or effects of the transaction on said elements.

 The equity of the an owner is affected by the profit (or net income) or loss (net loss) of
the business enterprise. Since the profit or loss is computed by deducting the total
expenses from total income, then income and expenses would also affect the equity
of the owner.

 Likewise, an increase or decrease in an income or an expense element may affect an

asset, a liability, or both elements.
 Increase/decrease rules:

 Increase in asset may be due to:

o Increase in liability,
o Increase in owner’s equity,
o Decrease in another form of asset, or
o Decrease in income (revenue or gain)
 decrease in asset may due to:
o Decrease in liability,
o Decrease in owner’s equity,
o Increase in another form or asset, or
o Increase in expense (or loss)
 Rules of Debit and Credit

 Debit means “a value entered on the left side of an account”.

 Credit means “a value entered on the right side of an account”.

 the accountant may use the abbreviation of “Dr.” to indicate a debit or

debit entry, and “Cr.” to indicate a credit or credit entry
 Rules of Debit and Credit

 A debit or debit entry is used to indicate:  A credit or credit entry is used to indicate:

o An increase in a asset, o A decrease in an asset,

o A decrease in a liability,
o An increase in a liability,
o A decrease in equity,
o An increase in equity,
o An increase in an expense (or a loss), or
o A decrease in an expense (or a loss), or
o A decrease in an income (a revenue or a
o An increase in an income (a revenue or
gain)
a gain)
 Assets = Liabilities + Capital account
Debit Credit Debit Credit Debit Credit
Increase Decrease Decrease Increase Decrease Increase
- -
+
-
+ +
Drawing account
-
Debit Credit
Increase Decrease
-
The Accounting Elements and the Rules of
Debit and Credit +
+ Revenues and Gains
Debit Credit
Decrease Increase
-
+
- Expenses and Losses
Debit Credit
Increase Decrease
-
+
 Reliable Repair Shop – Application of increase/decrease rules

Business transactions Assets Liabilities Equities

1 The owner invested his savings in Cash, increase Juan de la Cru,
a repair shop business Capital increases
equity
2 Bought shop tools on cash basis Tools, increase
Cash, decrease
3 Bought equipment on credit Equipment, Accounts
basis increase payable, increase
4 Paid business permits to the Cash, decrease Taxes and licenses
government expense,
decreases equity
5 Bought shop supplies on cash Cash, decrease Suppliers expense,
basis. decreases equity
6 Bought shop supplies on credit Accounts Supplies expense,
term. payable, increase decreases equity
 Reliable Repair Shop – Application of increase/decrease rules

Business transactions Assets Liabilities Equities

7 Borrowed money from a finance Cash, increase Loans payable,
company to meet the cash increase
needs of the shop
8 Rendered repair services to Cash, increase Service revenues,
customers in exchange for cash increases equity
9 Rendered repairs services to Accounts Service revenues,
various customers on credit receivable, increases equity
terms increase
10 Paid the seller of equipment in Cash, decrease Accounts
full. payable,
decrease
11 Collected from the customers, Cash, increase
to apply on account, for Accounts
services rendered on credit. receivable,
decrease
 Reliable Repair Shop – Application of increase/decrease rules

Business transactions Assets Liabilities Equities

12 Paid the wages of the shop assistant Cash, decrease Wages expense,
decreases equity
13 Paid the rent of the space for two Cash, decrease Rent expense,
months. decreases equity
14 Collected cash for renting out a Cash, increase Rent revenue,
small corner of the shop increase equity
15 Took home some cash from the Cash, decrease Juan de la Cruz,
business’ collections, for his family’s Drawing
use. decrease equity
 Example: Transactions of Reliable Repair
Shop
 Transaction 1: Juan de la Cruz, proprietor, invested his P100,000 cash savings in a
repair shop. De la Cruz registered the business under the name “Reliable Repair Shop”

Analysis: Asset (in the form of Cash) would increase.

Equity of the proprietor over the business’ assets increase. Juan de la Cruz,
Capital would increase.

Remember the equation:

Assets = Liabilities + Equity
Cash = J. Cruz, Capital
100,000 100,000

100,000 = 100,000
 Example: Transactions of Reliable Repair
Shop
 Transaction 2: Bought shop tools on cash basis, P12,000

Analysis: Asset (in the form of Tools) would increase another asset (in the form of Cash)
would decrease.

Remember the equation:

Assets = Liabilities + Equity

Cash Tools = J. Cruz, Capital

100,000 0 + 100,000
(12,000) 12,000 = + 100,000
88,000 12,000

100,000 = 100,000
 Example: Transactions of Reliable Repair
Shop
 Transaction 3: Bought shop equipment from Grasco Equipment Corporation, P65,500
Term: on credit
Analysis: Asset (in the form of equipment) would increase.
Liability (in the form of Accounts payable) would decrease.

Assets = Liabilities + Equity

Cash Tools Equipment = Accounts payable J. Cruz, Capital

88,000 12,000 0 0 + 100,000
65,500 = 65,500 + 100,000
88,000 12,000 65,500 65,500

165,500 = 165,500
 Example: Transactions of Reliable Repair
Shop
 Transaction 4: Paid the City Hall for the business permits and other required licenses,
P1,950.
Analysis: Expense (in the form of Taxes and licenses expense) would increase.
Expenses incurred decreases the equity of the owner.
Asset (in the form of Cash) would decrease.
Assets = Liabilities + Equity

Cash Tools Equipment = Accounts payable J. Cruz, Capital

88,000 12,000 65,500 65,500 + 100,000
(1,950) = + (1,950) taxes and licenses
expense

86,050 12,000 65,500 = 65,500 + 98,050

163,550 = 163,550
 Example: Transactions of Reliable Repair
Shop
 Transaction 5: Bought supplies from Weldone Industries, Inc., for cash, P3,000.
Analysis: Expense (in the form of Supplies expense) would increase.
Expenses incurred decreases the equity of the owner.
Asset (in the form of Cash) would decrease.

Assets = Liabilities + Equity

Cash Tools Equipment = Accounts payable J. Cruz, Capital

86,050 12,000 65,500 65,500 + 98,050
(3,000) = + (3,000) supplies expense

83,050 12,000 65,500 = 65,500 + 95,050

160,550 = 160,550
 Example: Transactions of Reliable Repair
Shop
 Transaction 6: Bought supplies from McMaster Industries, Inc., on credit, P8,500.
Analysis: Expense (in the form of Supplies expense) would increase.
Expenses incurred decreases the equity of the owner.
Liability (in the form of Accounts payable) would increase.

Assets = Liabilities + Equity

Cash Tools Equipment = Accounts payable J. Cruz, Capital

83,050 12,000 65,500 65,500 + 95,050
= 8,500 + (8,500) supplies expense

83,050 12,000 65,500 = 74,000 + 86,550

160,550 = 160,550
 Example: Transactions of Reliable Repair
Shop
 Transaction 7: Borrowed P20,000 from a finance company, to be used to met the
cash requirements of the shop. Term:2-year, 12% note, maturing on June 19,2003.
Analysis: Asset (in the form of Cash) would increase.
Liability (in the form of Loans payable) would increase.

Assets = Liabilities + Equity

Cash Tools Equipment = Accounts payable Loans payable J. Cruz, Capital

83,050 12,000 65,500 74,000 0 + 86,550
20,000 = 20,000
103,050 12,000 65,500 = 74,000 20,000 + 86,550

180,550 = 180,550
 Example: Transactions of Reliable Repair
Shop
 Transaction 8: Rendered services to cash customers from June 20 to 25, P13,250.
Analysis: Asset (in the form of Cash) would increase.
Income (in the form of Service revenues) would increase. Income earned
increases the equity of the owner.

Assets = Liabilities + Equity

Cash Tools Equipment = Accounts payable Loans payable J. Cruz, Capital

103,050 12,000 65,500 74,000 20,000 + 86,550
13,250 = + 13,250 service revenue
116,300 12,000 65,500 = 74,000 20,000 + 99,800

193,800 = 193,800
 Example: Transactions of Reliable Repair
Shop
 Transaction 9: Rendered repair services to various customers from June 20 to 25, on
credit basis, P18,500.
Analysis: Asset (in the form of Accounts Receivable) would increase.
Income (in the form of Service revenues) would increase. Income earned
increases the equity of the owner.

Assets = Liabilities + Equity

Cash Tools Equipment Accounts = Accounts Loans J. Cruz,
Receivable payable payable Capital
116,300 12,000 65,500 0 = 74,000 20,000 + 99,800
18,500 = + 18,500 service revenues
116,300 12,000 65,500 18,500 = 74,000 20,000 + 118,300

212,300 = 212,300
 Example: Transactions of Reliable Repair
Shop
 Transaction 10: Paid in full the amount due to Grasco Equipment Corporation.
Analysis: Liability (in the form of Accounts payable) would decrease.
Asset (in the form of Cash) would increase.

Assets = Liabilities + Equity

Cash Tools Equipment Accounts = Accounts Loans J. Cruz,
Receivable payable payable Capital
116,300 12,000 65,500 18,500 = 74,000 20,000 + 118,300
(65,500) = (65,500)
50,800 12,000 65,500 18,500 = 8,500 20,000 + 118,300

146,800 = 146,800
 Example: Transactions of Reliable Repair
Shop
 Transaction 11: Collected in full the P2,500 due from Karlo Mijares, one of the
customers who received services from the business on credit basis.
Analysis: Assets (in the form of Cash) would increase.
Another asset (in the form of Accounts receivable) would decrease.
Assets = Liabilities + Equity
Cash Tools Equipment Accounts = Accounts Loans J. Cruz,
Receivable payable payable Capital
50,800 12,000 65,500 18,500 = 8,500 20,000 + 118,300
2,500 (2,500) =
53,300 12,000 65,500 16,000 = 8,500 20,000 + 118,300

146,800 = 146,800
 Example: Transactions of Reliable Repair
Shop
 Transaction 12: Paid the wages of a part-time shop assistant, for the period of June 18
to 27, P3,000.
Analysis: Expense (in the form of Wages expense) would increase.
Expense incurred decreases the equity of the owner.
Asset (in the form of Cash) would decrease.
Assets = Liabilities + Equity
Cash Tools Equipment Accounts = Accounts Loans J. Cruz,
Receivable payable payable Capital
53,300 12,000 65,500 16,000 = 8,500 20,000 + 118,300
(3,000) = + (3000) wages expense
50,300 12,000 65,500 16,000 = 8,500 20,000 + 115,300

143,800 = 143,800
 Example: Transactions of Reliable Repair
Shop
 Transaction 13: Paid the rent to Fame Realty for June 16 to August 15, P14,000.
Analysis: Expense (in the form of Rent expense) would increase.
Expense incurred decreases the equity of the owner.
Asset (in the form of Cash) would decrease.

Assets = Liabilities + Equity

Cash Tools Equipment Accounts = Accounts Loans J. Cruz,
Receivable payable payable Capital
50,300 12,000 65,500 16,000 = 8,500 20,000 + 115,300
(14,000) = + (14,000) rent expense
36,300 12,000 65,500 16,000 = 8,500 20,000 + 101,300

129,800 = 129,800
 Example: Transactions of Reliable Repair
Shop
 Transaction 14: A tenant who operates a copier machine is using a small corner of the
shop. Rent collected for this, from June 16 to July 15, amounted to P800.
Analysis: Asset (in the form of Cash) would increase.
Income (in the form of Rent revenue) would increase.
Income earned increases the equity of the owner.
Assets = Liabilities + Equity
Cash Tools Equipment Accounts = Accounts Loans J. Cruz,
Receivable payable payable Capital
36,300 12,000 65,500 16,000 = 8,500 20,000 + 101,300
800 = + 800 rent revenue
37,100 12,000 65,500 16,000 = 8,500 20,000 + 102,100

130,600 = 130,600
 Example: Transactions of Reliable Repair
Shop
 Transaction 15: Juan de la Cruz withdrew P10,000 cash from the business collections,
for his family’s use.
Analysis: Equity of the proprietor over the business’ assets would decrease. Juna de l
a Cruz, Drawing would decrease.
Asset (in the form of Cash) would decrease.

Assets = Liabilities + Equity

Cash Tools Equipment Accounts = Accounts Loans J. Cruz, J.Cruz
Receivable payable payable Capital Drawing
37,100 12,000 65,500 16,000 = 8,500 20,000 + 102,100 0
(10,000) = + (10,000)
27,100 12,000 65,500 16,000 = 8,500 20,000 + 102,100 (10,000)

120,600 = 120,600
 ASSETS = LIABILITIES - EQUITY
Accounts Accounts Loans J. Cruz, J. Cruz, Income
Cash + Tools + Equipment + Receivables = Payable + Payable + Capital - Drawing + (Expenses)
1 100,000 - + - + - - + - + 100,000 - - +
(12,0000 12,000 = -
2 88,000 + 12,000 + - + - - + - + 100,000 - - + -
65,500 = 65,500
3 88,000 + 12,000 + 65,500 + - 65,500 + - + 100,000 - - + -
(1,950) = (1950)
4 86,050 + 12,000 + 65,500 + - 65,500 + - + 100,000 - - + -1950
(3,0000 = (3000)
5 83,050 + 12,000 + 65,500 + - 65,500 + - + 100,000 - - + (4,950)
= 8,500 (8,500)
6 83,050 + 12,000 + 65,500 + - 74,000 + - + 100,000 - - + (13,450)
20,000 - = 20,000
7 103,050 + 12,000 + 65,500 + 74,000 + 20,000 + 100,000 - - + -13,450
13,250 - = (13,250)
8 116,300 + 12,000 + 65,500 + 74,000 + 20,000 + 100,000 - - + (200)
18,500 = 18,500
9 116,300 + 12,000 + 65,500 + 18,500 74,000 + 20,000 + 100,000 - - + 18,300
(65,500) - = (65,500)
10 50,800 + 12,000 + 65,500 + 18,500 8,500 + 20,000 + 100,000 - - + 18,300
2,500 (2,500) =
11 53,300 + 12,000 + 65,500 + 16,000 8,500 + 20,000 + 100,000 - - + 18,300
(3,000) = (3,000)
12 50,300 + 12,000 + 65,500 + 16,000 8,500 + 20,000 + 100,000 - - + 15,300
(14,000) = (14,000)
13 36,300 + 12,000 + 65,500 + 16,000 8,500 + 20,000 + 100,000 - - + 1,300
800 = 800
14 37,100 + 12,000 + 65,500 + 16,000 8,500 + 20,000 + 100,000 - - + 2,100
(10,000) = (10,000)
15 27,100 + 12,000 + 65,500 + 16,000 8,500 + 20,000 + 100,000 - -10000 + 2,100
 THE END

References:

Kimwell, M.B., “Fundamentals of Accounting”

Manuel, Z.C “Accounting Process, Basic Concepts and Procedures, Int’l Ed.”