COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic: Business Transaction and their Analysis Part 1

Learning Outcomes:
• 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.
• Post transactions in the ledger.
• Prepare the unadjusted trial balance.

Core Value/Biblical Principles:

Proverbs 4:6-7
“Do not forsake wisdom, and she will protect you; love her, and she will watch over you. The beginning of wisdom
is this: Get wisdom, though it cost all you have, get understanding.”

Learning Activities and Resources:

Accounting is a process-oriented task that follows a prescribed series of steps in order to keep track of,
and record, the balances of the various accounts.
When a business makes a transaction, the effect of that transaction is recorded in the accounting
system. According to the fundamental accounting equation, each transaction will affect at least two accounts
and the balances in those accounts will change.
Accounting is the process of keeping track of those changes and recording and then reporting them.

Introduction:
Business transaction is the occurrence of an event or a condition that affects financial position and can be
reliably recorded.

Financial Transaction Worksheet

Every financial transaction can be analyzed or expressed in terms of its effects on the accounting equation. The
financial transactions will be analyzed by means of a financial transaction worksheet which is a form used to
analyze increases and decreases in the assets, liabilities, or owner’s equity of a business entity.

Body:

The Accounting Cycle

The accounting cycle represents the steps or procedures used to record transactions and prepare
financial statements. The accounting cycle implements the accounting processes of identifying, recording, and
communicating economic information.

Steps in the Accounting Cycle:

1. Identifying and analyzing
2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries
1. Identifying and analyzing transactions and events
This is the first step in the accounting cycle. It Involves identifying a business transaction and analyzing
whether or not that transaction affects the assets, liability, equity, income or expenses of the business.

A transaction that has an effect on the accounts is an "accountable event," which needs to be recorded
in the books of accounts. On the other hand, a transaction that has no effect on the accounts is a "non-
accountable event," which is not recorded in the books of accounts.

Transactions are normally identified from "source documents." Source documents are written
evidence containing information about transactions. Source documents come in various forms which
include, but not limited to, the following:

Sales invoice vs. Official receipt

Sales invoices (SI) are used for the sale of goods while Official receipts (OR), are used for the rendering of
services. For example, if you buy groceries, the grocery store will issue you a sale invoice; if you pay your
tuition fee in school, the school will issue you an official receipt.

Purchase order
A purchase order is a document issued by a buyer to a seller indicating the types, quantities and agreed
prices for products or services that the buyer intends to purchase. Purchase orders are prepared as internal
control over purchases.
For example, to prevent unnecessary purchases, you should require your personnel to prepare purchase
orders for all the purchases of your business.

Delivery receipt
A delivery receipt is a document signed by the receiver of a shipment acknowledging the receipt of the
goods.
Bank deposit slip
A deposit slip evidences a deposit to a bank account. It shows the date of deposit, the bank account name
and number, and the amount deposited.

Bank Statement
A bank statement is a report issued by bank (on a monthly basis) that shows the deposits and withdrawals
during the period and the cumulative balance of a depositor’s bank account.

Check
A check is an instrument that orders a bank (drawee) to pay the person named on the check or the bearer
thereof (payee) a definite amount of money from the drawer's bank account.

Statement of account
A statement of account is a report a business sends to its customer listing the transactions with the customer
during a period, the payments made by the customer and any remaining balance due from the customer. A
statement of account also serves as a notice of billing.
For example, a school periodically issues statements of accounts to its students reminding them to settle
any unpaid tuition fee.
Types of events
1. External events - are transactions that involve the business and another external party. Examples include
sale, purchase. borrowing of money, payment of liabilities, and the like.

2. Internal events are events that do not involve an external party. Examples include production (cooking
of barbecue) and casualty losses (e.g., destruction of properties due to storm, earthquake, and the like).

2. Journalizing
After an accountable event is identified and analyzed, the second step is to record it in the journal by
means of a journal entry. This recording process is called journalizing.

The following are the parts of a journal entry:

1. Date - journal entries are recorded in the journal chronologically, i.e ., arranged according to
the dates they are recorded.
2. Account titles and amounts to be debited and credited under the double-entry system, each
transaction is recorded in the journal in two parts - debit and credit.
3. Short description of the transaction - a short description of the transaction is provided for
future reference.

Journal entry
A journal entry has the following format:

Date Account title to be debited XXXX

Account title to be credited XXXX
Short description of the transaction

Simple and Compound journal entries

• Simple journal entry – contains a single debit and a single credit element.

• Compound journal entry – contains two or more debits or credits.

Note that the rules of double-entry system are observed in each transaction:
1. Two or more accounts are affected by each transaction.
2. The sum of the debits for every transaction equals the sum of the credits.
3. The equality of the accounting equation is always maintained.

Initial Investment (Source of Asset)

Maria Concepcion Jennifer Perez-Manalo is a social entrepreneur from

the South. She is into a lot of interesting causes. Her fine taste is
preeminent such that she is considered an authority in planning
May-01
weddings. Upon the advice and prodding of an esteemed colleague,
Bendalyn Landicho, Perez-Manalo decided to organize her wedding
consultancy. She invested P250,000 into this entity.
Analysis Assets increased. Owner's equity increased.
Increases in assets are recorded by debits. Increases in owner's
Rules equity are recorded by credits.
Increase in assets is recorded by a debit to cash. Increase in owner's
Entry equity is recorded by a credit to Perez-Manalo, Capital.
Dr. Cr.
Cash (A) 250,000
Perez-Manalo, Capital (OE) 250,000
Rent Paid in Advance (Exchange of Assets)

May-01 Rented office space and paid two months' rent in advance, 8,000.
Analysis Assets increased. Assets decreased.
Increases in assets are recorded by debits. Decreases in assets are
Rules recorded by credits.
Increase in assets is recorded by a debit to prepaid rent. Entry
Entry Decrease in assets is recorded by a credit to cash.
Dr. Cr.
Prepaid Rent (A) 8,000
Cash (A) 8,000

Note issued for Cash (Source of Assets)

Maria Concepcion Jennifer Perez-Manalo issued a promissory note for

a P210,000 loan from Metrobank. This availment will be used for the
May-02 acquisition of a service vehicle. The note carries a 20% interest per
annum. The arrangement with the bank is that both the interest and
the principal are payable in full in one year.
Analysis Assets increased. Liabilities increased.
Increases in assets are recorded by debits. Increases in liabilities are
Rules recorded by credits.
Increase in assets is recorded by a debit to cash. Increase in
Entry liabilities is recorded by a credit to notes payable.
Dr. Cr.
Cash (A) 210,000
Notes Payable (L) 210,000

Hired an Office Assistant

May 2 Hired an office assistant and an account executive each with a
May-02 P 7,800 monthly salary. Or, each is to receive P300 per day for the 26-
day work month. They started work immediately.
Analysis
Rules
Entry No entry is necessary at this point.

Service Vehicle acquired for Cash (Exchange of Asset)

May-04 Acquired service vehicle for P420,000.

Analysis Assets increased. Asset decreased.
Rules Increases in assets are recorded by debits. Decreases by credits.
Increase in assets is recorded by a debit to service vehicle. Decrease
Entry in assets is recorded by a credit to cash.
Dr. Cr.
Service Vehicle (A) 420,000
Cash (A) 420,000
Insurance Premiums Paid (Exchange of Asset)
Paid Prudential Guarantee and Assurance, Inc. P14,400 for a oneyear
May-04 comprehensive insurance coverage on the service vehicle.
Analysis An asset increased. Another asset decreased.
Increases in assets are recorded by debits. Decreases in assets are
Rules recorded by credits.
Increase in assets is recorded by a debit to prepaid insurance.
Entry Decrease in assets is recorded by a credit to cash.
Dr. Cr.
Prepaid Insurance (A) 14,400
Cash (A) 14,400

Office Equipment Acquired on Account (Exchange and Source of Assets)

Acquired office equipment from Fair and Square Emporium for
May-05 P60,000; paying P15,000 in cash and the balance next month. Note: A
compound entry is needed for this transaction.
Analysis Assets increased. Assets decreased. Liabilities increased.
Increases in assets are recorded by debits. Decreases in assets are
Rules recorded by credits. Increases in liabilities are recorded by credits.
Increase in assets is recorded by a debit to office equipment.
Decrease in assets is recorded by a credit to cash. Increase in
Entry liabilities is recorded by a credit to accounts payable.
Dr. Cr.
Office Equipment (A) 60,000
Cash (A) 15,000
Accounts Payable (L) 45,000

Supplies purchased on Account (Source of Assets)

Purchased supplies on credit for P18,000 from San Jose
May-08 Merchandising.
Analysis Assets increased. Liabilities increased.
Increases in assets are recorded by debits. Increases in liabilities are
Rules recorded by credits.
Increase in assets is recorded by a debit to supplies. Increase in
Entry liabilities is recorded by a credit to accounts payable.
Dr. Cr.
Supplies (A) 18,000
Accounts Payable (L) 18,000

Accounts Payable Partially Settled (Use of Assets)

May-09 Paid San Jose Merchandising P10,000 of the amount owed.

Analysis Assets decreased. Liabilities decreased.
Decreases in assets are recorded by credits. Decreases in liabilities
Rules are recorded by debits.
Decrease in liabilities is recorded by a debit to accounts payable.
Entry Decrease in assets is recorded by a credit to cash.
Dr. Cr.
Accounts Payable (L) 10,000
Cash (A) 10,000
Revenues Earned and Cash Collected (Source of Assets)
Coordinated and finalized simple bridal arrangements for three
couples and collected fees of P8,800 per couple. Services include
May-10 prospecting and selecting the church and reception location, couturier,
caterer, car service, flowers, souvenirs and invitations.
Analysis Assets increased. Owner's equity increased.
Increases in assets are recorded by debits. Increases in owner's
Rules equity are recorded by credits.
Increase in assets is recorded by a debit to cash. Increase in owner's
Entry equity is recorded by a credit to consulting revenues.
Dr. Cr.
Cash (A) 26,400
Consulting Revenue (OE:I) 26,400

Salaries Paid (Use of Assets)

May-13 Paid salaries, P6,600. The entity pays salaries every two Saturdays.
Analysis Assets decreased. Owner's equity decreased.
Decreases in assets are recorded by credits. Decreases in owner's
Rules equity are recorded by debits.
Decrease in owner's equity is recorded by a debit to salaries expense.
Entry Decrease in assets is recorded by a credit to cash.
Dr. Cr.
Salaries Expense (OE:E) 6,600
Cash (A) 6,600

Unearned Revenues Collected (Source of Assets)

The entity is earning additional revenues by referring consulting
May-15 clients to friendly hotels, caterers, printers, and couturiers. Received
P 10,000 advance fees for three clients referred.
Analysis Assets increased. Liabilities increased.
Increases in assets are recorded by debits. Increases in liabilities are
Rules recorded by credits.
Increase in assets is recorded by a debit to cash. Increase in liabilities
Entry is recorded by a credit to unearned referral revenues.
Dr. Cr.
Cash (A) 10,000
Unearned Referral Revenues (L) 10,000

Withdrawal of Cash by Owner (Use of Assets)

May-25 Perez-Manalo withdrew P14,000 for personal expenses.

Analysis Assets decreased. Owner's equity decreased.
Decreases in assets are recorded by credits. Decreases in owner's
Rules equity are recorded by debits.
Decrease in owner's equity is recorded by a debit to Perez-Manalo,
Entry Withdrawals. Decrease in assets is recorded by a credit to cash.
Dr. Cr.
Perez-Manalo, Withdrawals (OE) 14,000
Cash (A) 14,000
Revenues Earned on Account (Source of Assets)
Coordinated and finalized elaborate bridal arrangements for three
couples and billed fees of P12,000 per couple. Additional services
May-19 include documents preparation, consultation with a feng Shui expert
as to the ideal wedding date for prosperity and harmony, provision
for limousine service and honeymoon trip.
Analysis Assets increased. Owner's equity increased.
Increases in assets are recorded by debits. Increases in owner's
Rules equity are recorded by credits.
Increase in assets is recorded by a debit to accounts receivable.
Increase in owner's equity is recorded by a credit to consulting
Entry revenues.
Dr. Cr.
Accounts Receivable (A) 36,000
Consulting Revenues (OE:I) 36,000

Salaries Paid (Use of Assets)

May-27 Paid salaries, P7,200.

Analysis Assets decreased. Owner's equity decreased.
Decreases in assets are recorded by credits. Decreases in owner's
Rules equity are recorded by debits.
Decrease in owner's equity is recorded by a debit to salaries expense.
Entry Decrease in assets is recorded by a credit to cash.
Dr. Cr.
Salaries Expense (OE:E) 7,200
Cash (A) 7,200

Expenses Incurred but Unpaid (Exchange of Claims)

May-30 Received the ICC-BayanTel telephone bill, P1,400.

Analysis Liabilities increased. Owner's equity decreased.
Increase in liabilities are recorded by credits. Decrease in owner's
Rules equity are recorded by debit.

Decrease in owner's equity is recorded by a debit to Utilities expense.

Entry Increase in liabilities is recorded by a credit to utilities payable.
Dr. Cr.
Utilities Expense (OE:E) 1,400
Utilities Payable (L) 1,400

Accounts Receivable Partially Collected (Exchange of Assets)

May-30 Received P24,000 from two clients for services billed last May 19.
Analysis An asset increased. Another asset decreased.
Rules Increase in assets are recorded by debits. Decrease as credits.
Increase in assets are recorded by debit to cash. Decrease in assets is
Entry recorded by a credit to accounts receivable.
Dr. Cr.
Cash (A) 24,000
Accounts Receivable (A) 24,000
Expenses Incurred and Paid (Use of Assets)

May-31 Settled the electricity bill of P3,000 for the month.

Analysis Assets decreased. Owner's equity decreased.
Decreases in assets are recorded by credits. Decreases in owner's
Rules equity are recorded by debits.
Decrease in owner's equity is recorded by a debit to utilities expense.
Entry Decrease in assets is recorded by a credit to cash.
Dr. Cr.
Utilities Expense (OE:E) 3,000
Cash (A) 3,000

3. Posting to Ledger

Ledger
A grouping of the entity's accounts is referred to as a ledger. Although some firms may use various
ledgers to accumulate certain detailed information, all firms have a general ledger. A general ledger is the
"reference book" of the accounting system and is used to classify and summarize transactions, and to prepare
data for basic financial statements. The accounts in the general ledger are classified into two general groups:
a) Balance sheet or permanent accounts (assets, liabilities and owner's equity).
b) Income statement or temporary accounts (income and expenses).

• Temporary or nominal accounts are used to gather information for a particular accounting period. At
the end of the period, the balances of these accounts are transferred to a permanent owner's equity
account. Each account has its own record in the ledger. Every account in the ledger maintain: the basic
format of the T-account but offers more information (e.g. the account number at the upper right corner
and the journal reference column). Compared to a journal, ledger organizes information by account.

CHART OF ACCOUNTS
A listing of all the accounts and their account numbers in the ledger is known as the chart of accounts.
The chart is arranged in the financial statement order, that is, assets first, followed by liabilities, owner's equity,
income and expenses. The accounts should be numbered in a flexible manner to permit indexing and cross-
referencing.
When analyzing transactions, the accountant refers to the chart of accounts to identify the pertinent
accounts to be increased or decreased. If an appropriate account title is not listed in the chart, an additional
account may be added. Presented below is the chart of accounts for the illustration:
Posting to Ledger
Posting means transferring the amounts from the journal to the appropriate accounts the ledger. Debits in
the journal are posted as debits in the ledger, and credits in the journal as credits in the ledger. The steps are
illustrated as follows:

1. Create a T-account/ Ledger for every account name.

2. Transfer the date of the transaction from the journal to the ledger.
3. Post the debit figure from the journal as a debit figure in the ledger and the credit figure from the
journal as a credit figure in the ledger.

Ledger Accounts after Posting

At the end of an accounting period, the debit or credit balance of each account must be determined to
enable us to come up with a trial balance.

❖ Each account balance is determined by footing (adding) all the debits and credits.
❖ If the sum of an account's debits is greater than the sum of its credits, that account has a debit balance.
❖ If the sum of its credits is greater, that account has a credit balance.

4. Unadjusted trial balance

The trial balance is a list of all accounts with their respective debit or credit balances. It is prepared
to verify the equality of debits and credits in the ledger at the end of each accounting period or at any time the
postings are updated.

Types of Trial balance

a. Unadjusted trial balance – this is prepared before adjusting entries are made.
b. Adjusted trial balance – this is prepared after adjusting entries but before the financial statements
are prepared.
c. Post-closing trial balance – this is prepared after the closing process.

The procedures in the preparation of a trial balance follow:

1. List the account titles in numerical order.
2. Obtain the account balance of each account from the ledger and enter the debit balances in the debit
column and the credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.
 Future CPAs Shop
Unadjusted Trial Balance
December 31, 2022
Accounts Debit Credit
Cash 9,218
Accounts receivable 7,277
Office Supplies 2,750
Prepaid rent 8,712
Equipment 21,829
Accumulated Depreciation 1,535
Accounts payable 7,117
Owner’s, Capital 37,417
Owner’s, drawings 3,234
Service fees 28,699
Salaries expense 15,929
Miscellaneous Expense 5,819
Total 74,768 74,768

Trial balance is a control device that helps minimize accounting errors. When the totals are equal, the
trial balance is in balance. This equality provides an interim proof of the accuracy of the records, but it does not
signify the absence of errors. For example, if the bookkeeper failed to record payment of rent, the trial balance
columns are equal but in reality, the accounts are incorrect since rent expense is understated and cash
overstated.

Errors revealed by a trial balance

1. Journalizing or posting one-half of an entry, i.e., a debit without a credit, or vice versa.
2. Recording one part of an entry for a different amount than the other part.
3. Errors of Transplacement (Slide error) on one side of an entry.
4. Error of Transposition on one side of an entry.

Errors not revealed by a trial balance

1. Failure to record or post a transaction.
2. Recording the same transaction more than once.
3. Recording an entry but with the same erroneous debit and credit amounts.
4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.

Life Application:
The application of accounting is indeed more synonymous with businesses. However, accounting for personal
finance is very important too. The goal is to organize or record our finances so that they remain stable or can
be said to be healthy. Unconsciously, people already use accounting in their daily life, for example, first for
budgeting and managing your spending. We can know where and how the money we have is used. In addition,
we can also record where and how much income we are getting for our finances. Then how can we apply
accounting in everyday life, especially to manage our finances? We can start by making a journal for our
financial records. Journals will record what our expenses are in a month, starting from the smallest expenses
to the largest expenses. We can also record our income each month, so that at the end of the month we can find
out how much expenses were occurs in this month and we can plan our spending for the next month. This can
be a way to make our finances more effective and efficient.

Summary:
• Accounting cycle. A series of steps performed during the accounting period (some throughout the
period and some at the end) to analyze, record, classify, summarize, and report useful financial
information for the purpose of preparing financial statements.
 • Accrual basis of accounting. Recognizes revenues when sales are made or services are performed,
regardless of when cash is received. Recognizes expenses as incurred, whether or not cash has been
paid out.
• Business transactions. Measurable events that affect the financial condition of a business.
• Chart of accounts. The complete listing of the account titles and account numbers of all of the accounts
in the ledger; somewhat comparable to a table of contents.
• Credit. The right side of any account; when used as a verb, to enter a dollar amount on the right side
of an account; credits increase liability, stockholders’ equity, and revenue accounts and decrease asset,
expense, and Dividends accounts.
• Credit balance. The balance in an account when the sum of the credits to the account exceeds the sum
of the debits to that account.
• Debit. The left side of any account; when used as a verb, to enter a dollar amount on the left side of an
account; debits increase asset, expense, and Dividends accounts and decrease liability, stockholders’
equity, and revenue accounts.
• Debit balance. The balance in an account when the sum of the debits to the account exceeds the sum
of the credits to that account.
• Double-entry procedure. The accounting requirement that each transaction must be recorded by an
entry that has equal debits and credits.
• Journal. A chronological (arranged in order of time) record of business transactions; the simplest form
of journal is the two-column general journal.
• Journal entry. Shows all of the effects of a business transaction as expressed in debit(s) and credit(s)
and may include an explanation of the transaction.
• Journalizing. A step in the accounting recording process that consists of entering the effects of a
transaction in a journal.
• Ledger. The complete collection of all of the accounts of a company; often referred to as the general
ledger.
• Posting. Recording in the ledger accounts the information contained in the journal.
• T-account. An account resembling the letter T, which is used for illustrative purposes only. Debits are
entered on the left side of the account, and credits are entered on the right side of the account.
• Trial balance. A listing of the ledger accounts and their debit or credit balances to determine that
debits equal credits in the recording process.

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References:
Financial Accounting and Reporting (fundamentals) [by: Millan, Zeus Vernon B. (2021)]
Basic Financial Accounting and Reporting: Domdane Publishers and Made Easy [Ballada, Win. (2019)]
Bookshttps://content.moneyinstructor.com/1490/accounting-process.html
https://courses.lumenlearning.com/vccs-acc211-17sp/part/lesson-4-completion-of-the-accounting-cycle/
https://www.asaprasmul.com/newsletter/accounting-in-daily-life/