THE ACCOUNTING CYCLE

1. Identifying whether the transaction is a business transaction to be recorded in the

accounting books.

Business Transaction:

> Requisites:
1. There are two parties involved
2. There has been an exchange
3. The exchange is measurable in monetary terms.

COMMON ACCOUNTING TRANSACTIONS

 
•Investment of the owner.
•Purchasing Equipment on cash or credit.
•Purchasing goods or commodities on cash or on credit.
•Selling of goods or services.
•Payment of expenses
•Collection of accounts receivable
•Payment of accounts payable
  
Determine whether the following are Business Transaction and identify the rights or things
involved in the exchange.
 
1. The owner Ms. Escosio, invested P100, 000 cash to start her food
business named “LA Tupalé”
Req1. There are 2 parties-- the owner and the business
Req2. There is an exchange--the owner obtained an investment and the business
obtained an asset.
Req3. The exchange is measurable- P10, 000.

Since all of the requirements are met, the transaction is recordable in the books of
the business.
 
2. Signed a contract of rent with Alvarez Building providing for a monthly rental of P4000, on
the space to be occupied by the shop.
Req1. There are 2 parties-- Alvarez Building and the LA Tupale
Req2. There is NO EXCHANGE here. This is signing of contracts only. In this
contract of rent, the exchange will happen only when LA Tupale starts using the rental
space.
Req3. There is no exchange, therefore there is nothing to measure yet.
Since one of the requirements are not met yet, this transaction is not to be recorded
yet.
 
3. Bought for cash tables and chairs worth P30, 000.
 
4. Paid P2000 for kitchen utensils bought from Garcia Company.
 
5. Hired a head chef at an agreed monthly pay of P6, 000.
 
6. Chandelier valued at P9000 were ordered from Juanola Arts and Crafts.
7. Cash of P1000 was received from Mr. Avila for meals delivered on the same date.
 
8. Two waitresses were hired at a daily wage of P250.
 
9. Sent a bill for P35, 000 to Fuentes Events and Place for catering services rendered last
week.
 
10. Received the gourmet ingredients from Aglinao enterprises and paid them in cash.
 
11. Paid the wages of shop waitresses for the week, P3500.
 
12. Collected P25, 000 from Fuentes Events and Place.
 
13. Paid the rent on Alvarez Building, P4000
 
14. Paid the head chef half month salary for services rendered, P 3000.
 
15. Collected the balance of Fuentes Events and Place.
 

TYPES AND EFFECTS OF TRANSACTIONS

 
1. Source of Assets (SA). An asset account increases and a corresponding claims (liabilities
or equity) account increases.
Examples:
Purchase of machinery on account for P500, 000.
Depiction in Accounting Model

Assets = Liability + Equity

 P 500,000   = P500,000     

Spencer invested P 1,200,000 cash for her tailoring business

Depiction in Accounting Model

Assets = Liability + Equity

 P1,200,000        P1,200,000

         
2. Exchange of Asset (EA)– One asset account increases and another asset account
decreases.
Example:
Bought office supplies amounting to P15, 000 for cash.

Depiction in Accounting Model

Assets = Liability + Equity

P 15,000
(P15,000)
0 = 0

Collection of accounts receivable worth P45,000

Depiction in Accounting Model

Assets = Liability + Equity

P45,000
(P45,000)
0 = 0

3. Use of Assets (UA) - An asset account decreases and a corresponding claims (liability or
equity) account decreases.
Example:
Paid P 42, 000 of accounts payable due.

Depiction in Accounting Model

Assets = Liability + Equity

 (P42,000)   (P42,000)    

Paid Repairs and Maintenance Expense worth P17,500

Depiction in Accounting Model

Assets = Liability + Equity

 (P17,500)    (P17,500)

4. Exchange of Claims– One claims (liability or equity) account increases while another
claims (liability or equity) account decreases.
Example:
Received a telephone bill and left it unpaid, P 4500

Depiction in Accounting Model

Assets = Liability + Equity

    P 4,500   (P4,500)

Exercise 1. Identify the type of transaction.

____________________ 1. Borrowed money from a bank, P90,000

____________________ 2. Purchase of office computer for cash, P25,000.

____________________ 3. Acquisition of air conditioning units for P120,000.

____________________ 4. Performance of services for cash, P45,000.

____________________ 5. Payment of electricity bill received on the same day, P12,000.

____________________ 6. Payment of internet bill received last week, P38,000.

____________________ 7. Receipt of payment from a credit customer, P6,000

____________________ 8. Purchase of supplies on account, P7,500

____________________ 9. Investment of cash to a new business, P800,000.

____________________ 10. Payment for salaries, P30,000.

Exercise 2. Determine the effect on each element of financial statement incorporating

income and expenses to Equity account. Use (+) if the element increased, (-) if the element
decreased and (0) if the amount of element did not change.

Transactions Assets Liabilities Equity

1. Rendered services on
account
2. Hiring 4 employees to be
paid weekly.
3. Payment for insurance in
advance.
4. Received a telephone bill.
5. Paid for acquired services
on account.
6. Bought office supplies for
cash.
7. Payment of interest
expense
PREPARING A FINANCIAL TRANSACTION WORKSHEET

Illustrative Example:

September 1 Invested P350,000 in a business and named it “Super Kicks”, a shoe

customization shop.

3 Signed a contract of rent with Hun Building, agreeing to pay a monthly

rent of P1,200 payable at each end of the month.

Bought store equipment for cash amounting to P90,000.

5 Acquired Machineries totaling P200, 000 paying 50% cash and the
rest are charged on account.

8 Rendered services to client for cash, P15, 000

10 Paid P10,000 for one week salary of the employees.

12 Performed customization services for a school shoes uniform

amounting to P165, 000. P65,000 was received as down payment while the rest is payable
upon pickup of shoes.

15 Paid the remaining balance for the transaction on September 5.

First Step: List down all accounts that will be used in all the transactions to avoid
adjustments when plotting the amounts in the transaction worksheet

September 1 Cash, Owner’s Equity

3 Store Equipment (Cash is already listed because of transaction 1)
5 Machineries, Accounts Payable
8 Service Revenues
10 Salaries Expense
12 Accounts Receivable
15 (all accounts needed are already listed)
Second Step: Group the accounts according to the elements of financial statements

Assets: Cash, Accounts Receivable, Store Equipment, Machineries

Liabilities: Accounts Payable
Equity: Owner’s Equity
Income: Service Revenues
Expenses: Salaries Expense

Third Step: Prepare the table.

a. The heading must contain the following in order
The Company Name
Financial Transaction Worksheet
For the period ended September 15, 2020
 b. All first and last amounts in each column must have Currency Sign

Super Kicks
Financial Transaction Worksheet
For the period ended September 15, 2020

Assets Liabilities Equity Income Expense

2020 Cash AR S. Mach. AP OE Ser. Rev Sal. Exp
Equip.
September 1 P350,00 P350,000
0
3 (90,000) P90,000
Balance 260,000 90,000 350,000
5 (100,000 P200,00 P100,000
) 0
Balance 160,000 90,000 200,000 100,000 350,000
8 15,000 15,000
175,000
10 (10,000) 10,000
165,000
12 65,000 P100,000 165,000
230,000
15 (100,000 (100,000)
)
Balance, end P130,00 P100,000 P90,000 P200,00 0 P350,000 P180,000 P10,000
0 0

P 520, 000 = P 520, 000

Note that the Expenses are deducted on the right side. This is due to the fact that expenses
decreases Equity, the same reason why its normal balance is debit—contrast to Equity and
Income normal side of credit.

Exercise 3. Prepare a Financial Transaction Worksheet

Axlrose llao decided to put up a business and named it “Ilao-Ilao Computer Shop”.
The following are transactions that occurred during the month:

1. Axl invested P560, 000 in the business.

2. Paid P3,500 for various permits and licenses.
3. Paid the rent of the space for the month, P8,000
4. Purchased 12 units of computer for P15, 000 each and 3 copier machines at P7,000 each
paying 50% downpayment.
5. Acquired various supplies for the shop worth P13,500.
6. Received fees from computer users totaling P4, 600
7. Paid salaries of two assistants, P6,500
8. Received a 15-days 10% notes receivable in exchange for a three-day computer rent of
DOTA tournament association, P24, 000.
9. Performed typing and printing job for instructional materials of a nearby school, P28,500,
40% down payment was received.
10. Paid the remaining balance on computer equipments and copier machines.
11. Received internet and electricity bill for a total amount of P11,900.
12. Received payment from DOTA association including interest.
13. Paid two assistants of its second semi-monthly salary, P6,500