FABM - BUSINESS TRANSACTIONS AND THEIR ANALYSIS

2. Record Transactions - Journalizing the identified

Accounting Cycle - represents the STEPS or procedures used to accountable events are recorded in the journals.
record transactions and prepare financial statements. 3. Post to general ledger - information from the journal
are transferred to the ledger.
STEPS IN ACCOUNTING CYCLE: 4. Unadjusted Trial Balance - e balances of the general
ledger accounts are proved as to the equality of debits
1. Identify Transaction - The accountant gathers information
and credits. The unadjusted trial balance serves as basis
from source documents and determines the effect of the for adjusting entries.
transactions on the accounts. 5. Adjusting Journal Entries - accounts are updated as of
the reporting date on an accrual basis by recording
Transaction analysis only involves three simple steps
accruals, expiration of deferrals, estimations, and other
 Classify whether the transaction is a business or a
events often not signaled by new source documents.
nonbusiness transaction. If the transaction is 6. Adjusted Trial Balance - equality of debits and credits
nonbusiness, then there is no need to proceed to step are rechecked after adjustments. The adjusted trial
2. balance serves as basis for preparation of financial
 Identify the major account/s and the account title/s statements.
affected and the movements with respect to its normal 7. Prepare financial statements - These are how the
balances. information processed is communicated to users.
 Determine the amount/s to be credited or debited 8. Close Year End - This involves journalizing and posting
closing entries and ruling the ledger. Temporary
Source documents - are written evidences containing accounts (or nominal accounts) are closed, and the
information about transactions. Transactions are normally resulting profit or loss is transferred to an equity
identified from this. account.

ANALYZING SOURCE DOCUMENTS 2. DEBIT AND CREDIT RULES - are considered the Golden
Rules of Accounting
in order to analyze the documents properly, a bookkeeper has
to first understand the following concepts: Debit – an entry/amount recorded on the left side of an
account that increases assets, drawing and expense, but
ACCOUNTING EQUATION decreases Liabilities, Owner's Equity and Revenue. Debit is
- is considered as the foundation of the Double-Entry also referred to as the “value received” by the business.
Bookkeeping System.
- It shows the relationships between the three major Credit – an entry/amount recorded on the right side of an
categories of accounts – Assets, Liabilities and Owner’s account that increases Liabilities, Owner's Equity and
Equity thru a mathematical formula. Thus, it can be stated Revenue, but decreases Assets, Drawing, and Expense.
that: Credit is also referred to as the “value parted with” by the
business.
Accounting Equation is the mathematical expression of the
relationship between Assets, Liabilities and Equity T-Account

Assets = Liabilities + Owner’s Equity - is thus named because it resembles the letter “T”. It’s an
informal graphic representation of account and a useful
- This equation shows that the total assets of the business tool to organize and show double-entry transactions
are equal to its total liabilities and the - In practice, a T-account is not an official counting
- owner’s equity (or capital). What this basically means is document and is used more as a teaching aid to
that: visualize the changes in the values of an account. The T-
account is also helpful in tracking and finding errors
“What the business OWNS is equal to what it OWES to creditors
and the owner” RULES:
Take note also that when expressing the accounting equation, 1. ALL accounts have a Left side and a Right side. The Left
the terms on the right side of the equation should NOT be Debit side and the Right Credit side.
swapped or exchanged, meaning, the Liabilities should always 2. ALL accounts have an Increase side and a Decrease side
come first before the Owner’s Equity. The reason for this is that Rule #2 also shows that:
 Debits do not always represent an increase or a decrease
the owner’s equity is considered as only a residual amount after
to an accounts balance.
deducting the total obligations of the company (Liabilities) from  Credits do not always represent an increase or a decrease
its total properties (Assets). In other words, the creditors are to an account’s balance.
paid first and if there is a remaining balance (residual amount)  Whether a debit or a credit is an increase or decrease
depends on the type of account.
then it goes to the owner/s.
3. Asset, Drawing and Expense accounts INCREASE their
Debit side but DECREASES Credit side. Debit > credit
In mathematical terms, you can express the accounting These accounts have Normal DEBIT Balances
equation 4. Liabilities, Owner’s Equity and Revenue accounts
✓ Assets – Liabilities = Owner’s Equity increase Credit side but decrease Debit. Credit > Debit
These accounts have Normal CREDIT Balances
X Assets – Owner’s Equity = Liabilities

 Debit amounts are always added together.

Lastly, if a company keeps accurate records, the accounting  Likewise, Credit amounts are always added together.
equation will always be “in balance,” This balance is maintained  But when debit and credit amounts are computed, they
because every business transaction affects at least two of a company’s accounts involving a Debit and a Credit, the concept of which
is the cornerstone of Double-Entry Bookkeeping System.

RE-ARRANGED EXPANDED VERSION:

Assets + Drawing + Expense = Liabilities + Owner’s Equity + Revenue

The re-arranged expanded version now perfectly

represents the rules of
Debit and Credit
And to easily remember
The question that’s probably on your mind right now is: “If the which accounts have the
Debit and Credit Rules applies to the Accounting Equation, why kind of normal balance,
are there only 3 categories of accounts involved in the above remember this acronym
illustration?” If you remember right, the Debit and Credit Rules
involve 6 categories of accounts, that is, Assets, Drawing, 3. DOUBLE-ENTRY BOOKKEEPING SYSTEM
Expense, Liabilities, Owner’s Equity, and Revenue. However, in - a fundamental concept underlying modern accounting,
the above table only three categories are mentioned, i.e., is a method of recording that requires businesses to
Assets, Liabilities and Owner’s Equity. Allow me to explain that record every business transaction in at least two places
by doing some re-arrangements on our accounting equation. using a debit and a credit. Every transaction is recorded
in the books as a debit entry (value received) in one
STANDARD VERSION: Assets = Liabilities + Owner's Equity.
account and as a credit entry (value parted with) in
“Accounting Elements & Chart of Accounts”, Owner’s Equity has
another account.
three sub-categories - Drawing, Revenue and Expense. So let’s
- Has built-in checks and balances and is therefore
rewrite the equation:
self-balancing. the total of the debit values recorded
Assets = Liabilities + Owner's Equity. should always equal the total of the credit values
recorded. Due to its self-balancing nature, this recording
 + Revenue (+ sign because Revenue is added to Equity) method improves the accuracy of prepared financial
 - Expense (- sign because Expense is deducted from Equity) reports.
 - Drawing (- sign because Drawing is deducted from Equity) - invented by Venetian traders during the Renaissance
Period (14th – 16th century) and developed further by
EXPANDED VERSION:
an Italian monk and mathematician, Luca Pacioli, who
Assets = Liabilities + Owner's Equity + Revenue – Expense – Drawing explained and documented the process of double-entry
recording in his book “Summa de Arithmetica”. As a
Transposition method states that when transposing or moving result of his effort, he is considered as the “Father of
a term to the other side of the equation the mathematical sign Modern Accounting”
of the transposed term must be changed.

Following this rule, we’re going to transpose Expense and As an additional information and interesting trivia, Luca Pacioli
Drawing (terms with minus signs) to the left side of the supposedly wrote in his book:- “A person should not go to sleep at
equation, change their operational signs to plus, and we’ll get night until the debits equal the credits”.
this result:

ACCOUNTING CYCLE OF A SERVICE BUSINESS Errors revealed by a trial balance

 Journalizing or posting one-half of an entry, i.e. a debit

without a credit, or vice versa.
 Recording one part of an entry for a different amount
than the other part.
 Errors of Trans placement on one side of an entry.
 Errors of Transposition on one side of an entry
Preparing the Unadjusted Trial Balance

A Trial Balance is a list of general ledger accounts and their Transplacement Error is committed when the number of digits in
balances. It is prepared to check the equality of total debits and an amount is incorrectly increased or decreased, for example, a
total credits in the ledger Php1,000 amount is recorded as Php100 or Php10,000.

Types of Trial Balance Transposition Error is committed when digits in an amount are
interchanged, for example, a Php15,652 is recorded as Php15,625
 Unadjusted Trial Balance This is prepared before adjusting entries or Php15,265.
are made. Adjusting entries and consequently financial
statements cannot be prepared unless the total debits and credits Errors not revealed by a trial balance
in the unadjusted trial balance are equal
 Adjusted Trial Balance - is prepared after adjusting entries but  Journalizing or posting an entry twice
before the financial statements are prepared  Using wrong account with the same normal balance as the
 Post-closing Trial Balance is prepared after closing process correct account
 Wrong computation with the same erroneous amounts posted
to debit and credit sides
 The purpose of preparing the trial balance is to determine
whether the total debits and total credits in the ledger are
equal.
 If total debits and credits are not equal, an error surely exists in an account.

Mr. Soap started a laundry business called “Mabula Laundry Shop” on January 1, 20x1. The following were the
transactions during the first week of operation