Chapter 3

ANALYZING, RECORDING, AND CLASSI

FYING BUSINESS TRANSACTIONS

An accounting system must record all business

transactions to ensure complete and reliable
information when the financial statements are
prepared.

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What is a business transaction? 
A business transaction is an activity or event that can
be measured in terms of money and which affects the
financial position or operations of the business entity.

A business transaction has an effect on any of the

accounting elements

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Transactions may be classified as exchange and non-
exchange:

Exchange Non-exchange
transactions transactions

events that do not involve

involve physical physical exchanges but
exchange such as where changes in monetary
purchasing, selling, values are determinable,
collection of e.g. wear and tear of
receivables, and equipment, fire loss,
typhoon loss, etc.
payment of accounts.
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To qualify as an accountable/recordable
business transaction, the activity or event
must:

1. Be a transaction involving the business entity

2. Be of a financial character (in a certain amount of
money)
3. Have a dual or "two-fold" effect on the
accounting elements
4. Be supported by a source document

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1. Be a transaction involving the business
entity

The separate entity concept or accounting entity

assumption clearly establishes a distinction between
transactions of the business and those of its owner/s.

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2. Be of a financial character (in a certain
amount of money)
Transactions must involve monetary values, meaning
a certain amount of money must be assigned to the
elements or accounts affected.

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3. Have a dual or "two-fold" effect on the
accounting elements
• Every transaction has a dual or two-fold effect. For
every value received, there is a value given; or for
every debit, there is a credit. This is the concept of
double-entry accounting.

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4. Be supported by a source document

• The source documents serve as bases in recording

transactions in the journal.
• Examples of source documents are: Official Receipt
issued whenever cash is received, Sales Invoice for
sales transactions, Cash Voucher for payment in
cash, Statement of Account from suppliers, Vendor's
Invoice, Promissory Notes, and other business
documents.

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The Accounting
Equation

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 The basic accounting equation is:

Assets = Liabilities + Capital

As business transactions take place, the values of

the accounting elements change. The accounting
equation nonetheless always stays in balance.

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Every transaction has a two-fold effect.
Meaning, at least two accounts are
affected.

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The Accounting Process: Major
Steps
• Transactional Analysis
• Record the transaction in debit credit framework
• Summarize transactions

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Transaction Analysis
Watch: https://www.youtube.com/watch?v=5iS1Nif6qVc

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Step 1. Transactional Analysis
• Three questions to ask.
1. What accounts are affected?
2. Are the accounts increasing or decreasing?
3. Are the accounts assets, liabilities, or shareholders’
equity.

Ensure that the accounting equation holds true.

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Assume the following transactions for the Printing
Business:

1.Mr. Alex invested $20,000 to start a printing

business,
2.The company obtained a loan from a bank,
$30,000,
3.The company purchased printers and paid a total
of $1,000.

How will the transactions affect the accounting

equation?

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4. Rendered services and received
the full amount in cash, $500
5. Rendered services on
account (receivable from
customer), $750
6.Purchased office supplies on
account (payable to supplier),
$200
7.Had some equipment repaired
for $400, to be paid after 15 days
8.Mr. Alex, the owner, withdrew
$5,000 cash for personal use
9.Paid one-third of the loan
obtained in transaction #2
10.Received customer payment
from services in transaction #5

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4. Rendered services and received
the full amount in cash, $500
5. Rendered services on
account (receivable from
customer), $750
6.Purchased office supplies on
account (payable to supplier),
$200
7.Had some equipment repaired
for $400, to be paid after 15 days
8.Mr. Alex, the owner, withdrew
$5,000 cash for personal use
9.Paid one-third of the loan
obtained in transaction #2
10.Received customer payment
from services in transaction #5

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4. Rendered services and received
the full amount in cash, $500
5. Rendered services on
account (receivable from
customer), $750
6.Purchased office supplies on
account (payable to supplier),
$200
7.Had some equipment repaired
for $400, to be paid after 15 days
8.Mr. Alex, the owner, withdrew
$5,000 cash for personal use
9.Paid one-third of the loan
obtained in transaction #2
10.Received customer payment
from services in transaction #5

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The Transactional Analysis Worksheet

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 Your
turn.

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Generate a transactional analysis.
Use MS Excel.

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Debits and Credits
Must to watch: https://www.youtube.com/watch?v=VhwZ9t2b3Zk
https://www.youtube.com/watch?v=VhwZ9t2b3Zk
https://www.youtube.com/watch?v=n-
lCd3TZA8M&list=PLKbmcnUUQMlnWPLx9IeS-cYec2r7GzJ3S&index=3

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Step 2. Debits and Credits
• One of the first steps in analyzing a business transaction is
deciding if the accounts involved increase or decrease. 

• Translate these increase or decrease effects into debits and

credits.

• We use the words “debit” and “credit” instead of increase or

decrease.

• The accounting equation must always be in balance and the

rules of debit and credit enforce this balance.
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Debit and Credit Effects for Accounts

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Three important rules for recording transactions in
a double-entry accounting system

1. Increases in assets are debited to asset

accounts. Decreases in assets are credited to
asset accounts.
2. Increases in liabilities are credited to liability
accounts. Decreases in liabilities are debited
to liability accounts.
3. Increases in owner’s equity are credited to
owner’s equity accounts. Decreases in
owner’s equity are debited to owner’s equity
accounts.
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Increases in owner’s capital or revenues increase owner’s equity.
Increases in owner’s withdrawals or expenses decrease owner’s
equity. These relations are reflected in the following imporM.
Tant rules:

4. Investments by the owner are credited to owner’s

capital because they increase equity.
5. Revenues are credited to revenue accounts because
they increase equity.
6. Expenses are debited to expense accounts because
they decrease equity.
7. Withdrawals made by the owner are debited to
owner’s withdrawals because they decrease equity.

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Debits and Credits

If an asset increases, debit it. Otherwise,

credit.

If an liability increases, credit it. Otherwise,

debit.
If revenue increases, credit it. Otherwise,
debit.
If an expense increases, debit it. Otherwise,
credit.
If equity increases, credit it. Otherwise,
debit.

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Debits and Credits

The image shows where to place the amount of increase in the corresponding
account.

Example: If there is an increase in the asset account, amount should be under debit.

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Debits and Credits

https://www.youtube.com/watch?v=VhwZ9t2b3Zk
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 Your
turn.

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Indicate whether the following transactions increase or
decrease the relevant account.

1. A liability account is debited for $500.

2. A revenue account is credited for $1,000.
3. An asset account is debited for $300.
4. An expense account is credited for $75.
5. Owner’s capital is credited for $1,000.

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Journal
1. Journal is a book of accounting where daily records
of business transactions are first recorded in a
chronological order i.e. in the order of dates.
2. It is known as the primary book of
accounting or the book of original/first entry.
3. It is prepared out of transaction proofs such as
vouchers, receipts, bills, etc.
4. A journal is not balanced like a ledger.
5. The procedure of recording in a journal is known
as journalizing, which performed in the form of a
Journal Entry.
6. It may be subdivided into a cash book, a sales day
book, sales return day book, purchases day
book, purchases return day book, B/R Book, B/P Book,
Petty Cash Book.
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Journals and Journalizing
• Journal
• A form for recording
transactions in
chronological order

• The general journal is the book

that entity firstly records all the
daily financial transactions in it.

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Journals and Journalizing
• The journal entry is
recorded in the general
journal in a specified
format which includes the
following details:
1.Date of transaction
2.Ledger accounts involved
3.Amount of transaction
4.A brief narration to
describe the transaction

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 •debit: an entry in the left hand column of an account to
record a debt; debits increase asset and expense accounts and
decrease liability, income, and equity accounts
•credit: an entry in the right hand column of an account;
credits increase liability, income, and equity accounts and
decrease asset and expense accounts
•double-entry bookkeeping system: A double-entry
bookkeeping system is a set of rules for recording financial
information in a financial accounting system in which every
transaction or event changes at least two different nominal
ledger accounts.
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 Transactions That Occur In The
Accounting Cycle
Sales

A sale is a transfer of property for money or credit.

Revenue is earned when goods are delivered or services
are rendered. In double-entry bookkeeping, a sale of
merchandise is recorded in the general journal as a debit
to cash or accounts receivable and a credit to the sales
account.

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 Transactions That Occur In The Accounting
Cycle

Purchase transactions results in a decrease in the

finances of the purchaser and an increase in the
benefits of the sellers. Purchases can be made by
cash or credit. As credit purchases are made,
accounts payable will increase.

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 Transactions That Occur In The Accounting
Cycle

Receipts refer to a business getting paid by another

business for delivering goods or services. This
transaction results in a decrease in accounts receivable
and an increase in cash/ cash or equivalents.

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 Transactions That Occur In The Accounting
Cycle

Payments refer to a business paying to another

business for receiving goods or services. This
transaction results in a decrease in accounts payable
and an decrease in cash/ cash or equivalents.

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Assume the following transactions for the Printing
Business in the first half of May 2020.

May 01 - Mr. Alex invested $20,000 to start a printing business,

May 02 - The company obtained a loan from a bank, $30,000,
May 04 - The company purchased printers and paid a total of $1,000.
May 08 - Rendered services and received the full amount in cash, $500
May 09 - Rendered services on account (receivable from customer), $750
May 10 - Purchased office supplies on account (payable to supplier), $200
May 11 - Had some equipment repaired for $400, to be paid after 15 days
May 12 - Mr. Alex, the owner, withdrew $5,000 cash for personal use
May 13 - Paid one-third of the loan obtained in transaction on May 02
May 15 - Received customer payment from services in transaction May 09

Record the transactions in a general journal.

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The general Journal
• Some rules
• State the account to be debited
first.
• Assets as usually arranged in
order of liquidity… so cash,
followed by accounts receivable,
followed by supplies, and then
equipment..
• Indented for credited accounts
• indented for explanations...

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 Your
turn.

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 Generate a general journal using the accounts listed in
Slide 51.
1) 12/01 – M. Tan, invests P250,000 to start an internet café business
2) 12/04 – M. Tan purchase 5 sets of computer equipment on credit amounting to P100,000
3) 12/05 – M. Tan buys computer supplies for cash worth P50,000
4) 12/10 – M. Tan pay his taxes and licenses amounting to P20,000
5) 12/12 – M. Tan obtained a bank loan for business use and receives P100,000
6) 12/24 – Customers pay cash for internet rental amounted to P5,000
7) 12/24 – Customers render printing services on account amounted to P4,000
8) 12/27 – M. Tan paid in full the computer equipment he purchased on account (see 2nd
transaction)
9) 12/29 – M. Tan paid his monthly rental of P5,000 for the internet café shop space
10) 12/29 – M. Tan pays salaries and wages of his staff and employees, P20,000
11) 12/29 – M. Tan collects its accounts receivables amounted to P4,000 from customers (see
transaction 7)
12) 12/29 – Supplies amounted to P3,000 were used in business operation (see transaction 3)
13) 12/29 – M. Tan withdraws P25,000 cash for personal use
14) 12/30 – M. Tan invested additional cash capital amounting P50,000

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List of Accounts for Exercise in Slide 50.
Cash
Accounts Receivable
Computer Supplies
Computer Equipment
Accounts Payable
Loans Payable
Capital
Drawing
Internet Service Income
Printing Service Income
Salaries and Wages
Rental Expense
Computer Supplies Expense
Taxes and Licenses

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During the accounting cycle, there are two
important steps to be followed; recording
journal entries & preparing ledger accounts

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 Ledger
1. A ledger is an accounting book in which all similar
transactions related to a particular person or thing are
maintained in a summarized form.
2. It is known as the principal book of
accounting or the book of final entry.
3. It is prepared with the help of a journal itself,
therefore, it is the immediate step after recording a
journal.
4. Except for nominal accounts, all ledger accounts are
balanced to find the net result.
5. The procedure of recording in a ledger is known
as posting.
6. It may be sub-divided into general ledger,
debtors/sales ledger, creditors/purchases ledger.

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• https://www.youtube.com/watch?v=E4Vx1Apqsj4

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Chart of accounts numbering
Chart of accounts numbering involves setting up the
structure of the accounts to be used, as well as assigning
specific codes to the different general ledger accounts.

Division code - This is typically a two-digit code that identifies a specific company
division within a multi-division company. It is not used by a single-entity company.
The code can be expanded to three digits if there are more than 99 subsidiaries.

Department code - This is usually a two-digit code that identifies a specific

department within a company, such as the accounting, engineering, or production
departments.

Account code - This is usually a three digit code that describes the account itself, such
as fixed assets, revenue, or supplies expense.

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common coding scheme is as follows:

Assets - Account codes 100-199

Liabilities - 200-299
Equity accounts - 300-399
Revenues - 400-499
Expenses - 500-599 

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 https://www.prc.gov/docs/20/20643/intro.pdf
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 https://www.prc.gov/docs/20/20643/intro.pdf
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Create the General Ledger of the Previous Activity

Cash
Accounts Receivable
Computer Supplies
Computer Equipment
Accounts Payable
Loans Payable
Capital
Drawing
Internet Service Income
Printing Service Income
Salaries and Wages
Rental Expense
Computer Supplies Expense
Taxes and Licenses

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Trial Balance
• Watch:
• https://www.youtube.com/watch?v=FCt79VpERrM

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Unadjusted trial balance
• A trial balance is an internal accounting statement
prepared to check the accuracy of the company’s
accounting records.
• As the “trial” on its name suggests, it is made to check if
there are errors committed during the accounting
process, which involves journalizing and posting entries
to the general or subsidiary ledgers.
• Trial balance is prepared every end of the accounting
period, which can be annually, quarterly or even
monthly. It gets data from the ledgers.
• Thus, if your ledgers are accurately prepared, you’ll
most likely come up with a fair trial balance statement. 
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It is composed of the following:
a. Header – This consists of the name of the entity or
company, name of the statement (trial balance), and the date
of the reporting period.
b. Account titles – These are the accounts shown on your
general ledger (e.g., cash, accounts receivable, et cetera).
c. Ledger folio – This is the reference number from the ledger
accounts.
d. Debit column – The account’s balance in the ledger when
it results to a debit amount of balance.
e. Credit column – The account’s balance in the ledger when
it results to a debit amount of balance.
f. Total – the totals of the amounts in the debit and in the
credit column. The two should be equal or balanced.
Actually, a trial balance is just like a statement or a summary of your ledger account
balances.

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Proof Provided by the Trial Balance
The trial balance debit totals and credit totals are equal implies that the accounting work
is more likely to be free from any one or more of the following errors.
 

1. Error in preparing the trial balance including

-Addition error
-The amount of an account balance was in correctly listed on the trial balance
- A debit balance was recorded as a credit or vice versa
- A balance was entirely omitted.
 

2. Error in posting, including

- An erroneous amount was posted to the account.
- A debit amount was posted as a credit or vice versa
- A debit or credit posting was omitted

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Limitations of the Trial Balance
The trial balance amounts are equal doesn’t mean that the accounting work is free
from error. That is, there are errors that may take place without affecting the trial
balance totals. Some examples are mentioned below:
- Failure to record a transaction or to post a transaction
- Recording the same erroneous amount for both the debit and the credit parts of
a transaction.
- Recording the same transaction more than once.
- Posting part of a transaction to the correct side but the wrong account.

Note: All these errors have the same affect (increasing or decreasing) on the debit
totals and credit totals

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ADJUSTMENTS
the fact that a trial balance is balanced is still not a
definite confirmation that the accounts’ balances are
already accurate.

Adjusting entries may include:

• accrued revenues,
• accrued expenses,
• unearned income,
• prepared expenses,
• depreciation,
• change in accounting estimate,
• prior period errors.

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Adjusted trial balance
• Adjusting entries are recorded in the general journal just
like other regular transactions.

• They are then posted to the ledger just like other journal
entries to reflect the adjustments and correct their
balances.

• To prepare an adjusted trial balance, you need to reflect

those adjusting entries to adjust the account titles’
balances shown in the trial balance. 

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