INTEGRATED

ACCOUNTING
FUNDAMENTAL
Accounting Cycle and S
Course Material No. 5

Analyzing Business
Transactions

Marina V. Justiniani, CPA,

MBA
 2 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

Accounting Cycle and Analyzing

Business Transactions
5
LEARNING OUTCOMES

Here’s what I will teach you in this course material:

 Describe the accounting cycle
LESSON OUTLINE
 Understand the nature of the business transactions
 Identify different types of business documents
 The Accounting Cycle
Unit Outline
 Determine the accounts affected by common business transactions

 Analyzing Business

Transactions

RESOURCES NEEDED

For this lesson, you would need the following resources:

 Financial Accounting and Reporting

 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA 3

TABLE OF CONTENTS

Pretest 3 Questions for Review

and Discussion

Accountant’s Word Hunt

Before you start, try answering the following 4
questions.

True (T) or False (F) Accounting Cycle and

5 Analyzing Business
___1. The accounting cycle represents the steps followed Transactions
by accountant in recording, classifying, summarizing and
communicating financial information. 16 Test Yourself

___2. External events are those that involve the entity and
external party. 19 References

___3. Losses from natural disasters are considered

external events.

___4. The sale of goods is usually evidenced by a s

ource documents called “sales invoice.”

___5. To signify your intention to acquire goods from a

supplier, you would prepare a source documents called
“sales order.”
4 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

Accounting Cycle and

Analyzing Business
Transactions

The accounting cycle

represents the steps used to
record transactions and
prepare financial
statements.
The first step is identifying a
business transaction and
analyzing whether or not
transactions affects assets,
liability, equity, income or
expenses of the business

Accountant’s Word Hunt

Identify what is needed and color it according to the designated
color after the questions.

I D E N T I F Y U P
Find all the words that
F G D C R E D I T D corresponds to elements
S N B M T U R S T D of Accounting Cycle and
J O U R N A L I Z E Analyzing Business
Transactions inside the
H C T K X P M N S W
Box
S N S D S Q T A G I
P O S T I N G T Y B
T R I A L A L Q S T

B A L A N C E I N G
A D J U S T I N G Y
E N T R I E S M Q X
5INTEGRATED ACCOUNTING FUNDAMENTALS • NU INTEGRATED ACCOUNTING FUNDAMENTALS • NU 5
LAGUNA LAGUNA

The Accounting Cycle

The accounting cycle (also called the accounting process) represents the
chronological steps or procedures used to record transactions and prepare financial
statements. The accounting cycle implements the accounting process of identifying,
recording, classifying, summarizing and communicating economic information.

Steps in the Accounting Cycle

1. Documentation – this is where the accountant gather information from source
documents and determines the effect of the transactions to the accounting
elements specifically to which accounts.
2. Journalizing – this is where the accountable events (through the source documents)
are recorded in the journals.
3. Postings – the information from the journals are exactly transferred to the ledger.
4. Preparing the unadjusted trial balance- at the end of the accounting period the
balances of the general ledger accounts are summarized in this preliminary trial
balance. You
need to prove that the debits and credits from your books are equal. The
unadjusted trial balance is your basis for adjusting entries.
5. Journalizing and posting the adjusting entries – the accounts are updated as of the
reporting date using the accrual basis by recognizing accruals, expiration of deferrals and
prepayments, estimations and other events often not signaled by source documents.
6. Worksheet or preparing the adjusted trial balance – this will serve as you working paper
to validate the equality of the debits and credits (again for the second time) after you
have recognized the adjusting entries. The working paper (scratch paper) also will serve
as your basis for the preparation of the financial statements.
7. Preparing the financial statements -from the worksheet, the statement of financial
position and statement of profit/loss can be extracted. This is your means to
communicate information to different users.
6 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

8. Closing entries – this step will require you to journalize and posts the closing entries, rule
and balance the accounts in the ledgers. To close means to bring to zero balance all the
temporary accounts (income and expenses), and transferring the difference (either
profit or loss) to the owner’s capital account.
9. Preparing the post-closing trial balance – this is the summary of the balances in the
general ledgers after you journalized and posted the closing entries. And yes, this is to
validate the equality of the debits and credits(again for the third time).
10. Reversing entries – this step is usually done (optional) at the start of the next accounting
period. You are advised to reverse certain adjusting entries to simplify the recording of
certain transactions in the next accounting period.

This module will just explore documentation and journal entry preparation. For
simplicity purposes, you will be required to record transactions in the general journal
first.
7INTEGRATED ACCOUNTING FUNDAMENTALS • NU INTEGRATED ACCOUNTING FUNDAMENTALS • NU 7
LAGUNA LAGUNA

Analyzing Transactions

The first step in the accounting cycle is to identify and analyze a business transaction. A
transaction is said to be accountable when it meets these criteria: (1) a past event; (2) can be
measured reliably in terms of money; and (3) it has an effect to the assets, liability, equity,
income or expense accounts of the business. However, if the event did not meet the criteria
then it is a non-accountable event and you should not be recorded in the books.

Documentation
Transactions are identified through source documents. Documents show the written details of
the transactions that took place in the business. Source documents come in a variety of forms
and design. Some of the typical documents include, but not limited to, the following:
1. Sales invoices
2. Official receipts
3. Delivery receipts
4. Statements of account or Billing statement
5. Checks
6. Deposit slips

Sales Invoice – you use this for the sale of goods on credit (Cash Invoice if the sale is COD)
Merchandising and manufacturing businesses issue this. This Bureau of Internal Revenue (BIR)
requires that all merchandising and manufacturing business should register this document with
the agency.
Official Receipt – you issue this if you are a service business for the sale of your services for
cash. Similar to the invoice, the BIR requires that this document should be registered with the
agency.
8 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

Delivery Receipt – this is the document that shows proof of successful delivery of the
product. The document is signed by the receiver acknowledging the receipt of the
product in good condition.
Statement of Account – this is what you send to your customer reminding them of the
goods or services delivered to them on account. It may contain partial payments and any
remaining balance due from them (customer). A statement of account also serves as a
notice of billing. Check (Cheque) – this is a document ordering the drawee bank to give a
specific amount of money to the payee written in the check. The signatory of the check
(maker) is withdrawing money from the bank and is paid directly to the payee.
Check Voucher – this is what you prepare when cash (thru check) is paid to the
supplier of goods or services or when obligations are settled.
Bank Deposit Slip – this is the evidence of a cash or check deposit to bank account. You
always
get the duplicate copy of this document for file and record purposes.

Sample document:
9 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA 9

Parts of the document

Name of business Control Number
Contact Details Name of customer/supplier/payee
Tax Identification Number Body or details of the transactions
Name of document Authorized signature or validation
Date of transaction

Relationship of documents and journal entries

The various documents are the sources of the journal entries. So, a careful identification of
the appropriate document is always a good start in analyzing transactions. If you are receiving
cash, then the proper document issued should be the official receipt, if you are selling goods
then the proper document to prepare is the sales invoice, etc. The journal entry will then be
based on the document you prepared or in some cases the document you received.

Sample 1

`
10 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

The above document, sales invoice, means that Alvikana Marketing sold goods to Eduvigees Santos on
Sept 1, 2020 amounting to P1,000. Terms of the sale is credit, n/7.

Analysis:
Alvikana Marketing – increase in receivable and increase in equity (revenue)
Eduvigees Santos – increase in payable and decrease in equity (expense)

Journal Entries:
Alvina Marketing books – debit to Accounts Receivable and credit to Sales Revenue
Eduvigees Santos books – debit to Supplies Expense and credit to Accounts Payable

The above document means that Meralco, on June 23, 2020 sent a statement of account to Alvikana
Marketing for electricity used from May 23 to June 22, 2020 and is payable on June 30, 2020 amounting
to P857.40.

Analysis:
Alvikana Marketing – increase in liability and decrease in equity (expense)
Meralco – increase in asset and increase in equity (revenue)
1 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA 11
1

Journal Entries
Alvikana Marketing books– debit to Utility Expense and credit to Utility Payable
Meralco books – debit to Accounts Receivable and credit to Service Revenue

Journalizing
After an accountable event is identified and analyzed through documents,
then it is recorded in the journals. A journal entry is written and this process
is called journalizing. The journal entry has these parts:
1. Date – transactions are recognized chronologically and recorded on
the date they happen.
2. Debit entry- the account name and amount debited is written first.
3. Credit entry – the account name and amount is immediately written
after the debit entry.
4. Explanation – short detailed description of the transaction.

Sample
2020
June 23 Utility Expense 857.40
Utility Payable 857.40
Meralco bill for May 23-June 22.

Types of Journal Entries

1. Simple journal entry – an entry that has one debit entry and one
credit entry.
2. Compound journal entry – an entry that has more the one debit entry
or/and more than one credit entry.

SAMPLE TRANSACTIONS
The following are transactions of Luke Therapy Center for October 2020:
Date Transactions
Oct1 Lukie T. invested cash to his business, P300,000.
2 Business registration costs was paid P3,000.
3 Ordered equipment from San Franscis Co. P105,000
4 San Francis Co delivered the equipment, COD
5 Bought supplies from Doris Store, P5,000 on credit
12 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

ANALYSIS

Using the accounting equation

Date Assets = Liabilities + Equity

Oct-01 300,000 300,000
Oct-02 ( 3,000) (3,000)
Oct-03 na
Oct-04 105,000 (105,000)
Oct-05 5,000 5,000

Using the rules of debit and credit

Date Debit = Credit

Oct-01 Cash 300,000 Lukie, Capital 300,000
Oct-02 Business Registration 3,000 Cash 3,000
Oct-03 Na
Oct-04 Equipment 105,000 Cash 105,000
Oct-05 Supplies 5,000 Accounts Payable 5,000

JOURNAL ENTRIES
Date Particulars PR Debit Credit
2020
Oct 1 Cash P300000
Lukie T, Capital P300000
Investment

2 Business Registration 3000

Cash 3000
Registered business to DTI, BIR & LGU

4 Equipment 105000
Cash 105000
Bought from SF per invoice#234

5 Supplies 5000
Accounts Payable 5000
Bought from Doris Store per inv#870
1 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA 13
3

SAMPLE TRANSACTIONS
The following are transactions of Luke Therapy Center for the rest of October 2020:
Date Transactions
Oct7 Services rendered for cash 50,000
10 Services rendered to Lisa M. on account P5,000
15 Paid rent 3,000 and salary 15,000
24 Partial payment to Doris Store 3,000
27 Received billings from utility companies, 4,000

ANALYSIS

Using the accounting equation

Date Assets = Liabilities + Equity

Oct-7 50,000 50,000
Oct-10 5,000 5,000
Oct-15 (!8,000) (18,000)
Oct-24 (3,000) (3,000)
Oct-27 4,000 (4,000)

Using the rules of debit and credit

Date Debit = Credit

Oct-07 Cash 50,000 Service Income 50,000
Oct-10 Accounts Receivable 5,000 Service Income 5,000
Rent Expense 3,000
Oct-15 Salaries Expense 15,000 Cash 18,000

Oct-24 Accounts Payable 3,000 Cash 3,000

Oct-27 Utility Expense 4,000 Utility Payable 4,000
14 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

JOURNAL ENTRIES

Date Particulars PR Debit Credit

2020
Oct 7 Cash P50000
Service Income P50000
Rendered services to customers
10 Accounts Receivable 5000
Service Income 5000
Rendered service to Lisa M per SOA#01

15 Rent Expense 3000

Salaries Expense 15000
Cash 18000
Payment per check #310 &302

24 Accounts Payable 3000

Cash 3000
Payment to Doris Store per check#303

27 Utility Expense 4000

Utility Payable 4000
Meralco billing
Accounting Cycle and Analyzing of Business Transactions • NU LAGUNA

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FINANCIAL STATEMENTS

Luke Therapy Center

Statement of Profit and Loss
For the period ended October 31, 2020

Service Income P55,000

Less: Expenses
Salaries Expense P15,000
Utility Expense 4,000
Business Registration 3,000
Rent Expense 3,000 25,000
Net profit P30,000

Luke Therapy Center

Statement of Changes in Owner’s Equity
As of October 31, 2020

Lukie T, Capital Oct 1 P300,000

Add: Net Profit 30,000
Lukie T, Capital Oct 31 P330,000

Luke Therapy Center

Statement of Financial Position
As of October 31, 2020

ASSETS
Cash P221,000
Accounts Receivable 5,000
Supplies 5,000
Equipment 105,000
Total Assets P336,000

LIABILITIES & EQUITY

Accounts Payable P 2,000
Utility Payable 4,000
Lukie T, Capital 330,000
Total Liabilities & Equity P336,000
 16 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

Test Yourself
Choose the best answer:

1. The first step in the accounting cycle is

a. identifying accountable events and analyzing their effects on the accounts
b. recording a business transaction in debit/credit format
c. classifying the effects of the business transactions on the accounts
d. preparation of the unadjusted trial balance

2. Business transactions are normally identified from

a. source documents
b. journals
c. social media
d. accountant’s imagination

3. This source document evidences the buyer’s acknowledgment of his/her receipt of the goods he/she
has purchased. This is usually used when goods are shipped by the seller directly to the buyer’s
premises.
a. Sales income
b. Purchase order
c. Official receipt
d. Delivery receipt

4. Business transactions and other events can be broadly classified into external and internal events.
Which of the following is an internal event?
a. obtaining a bank loan
b. paying an account payable
c. purchasing inventories
d. production of goods

5. Transactions are recorded in the journal

a. chromatically
b. chronologically
c. alphabetically
d. numerically
Accounting Cycle and Analyzing of Business Transactions • NU LAGUNA

17

6. Which of the following is not one of the important parts of a journal entry?
a. Date
b. Account titles and amounts to be debited and credited
c. A detailed narrative of the reason why management entered into the transaction
d. Short description of the transaction

7. Which of the following is not an external event?

a. Rendering services to clients
b. Production of goods for sale
c. Purchase of raw materials for processing
d. Payment of notes payable

8. It is a report that a business sends to its customer listing the transactions with the customer during a
period, the payment made by the customer and any remaining balance due from the customer. It also
serves a notice of billing
a. Check
b. Bank statement
c. Delivery receipt
d. Statement of account

9. Which of the following accounts are affected when a business owner invests cash to the business?
a. Cash and Accounts receivable
b. Cash and Owner’s equity
c. Cash and Sales
d. Accounts receivable and Owner’s equity

10. The accountant recorded a transaction as a debit to Cash and a credit to Accounts receivable. The
transaction was a
a. sale on account
b. sale on cash basis
c. collection of accounts payable
d. collection of accounts receivable

11. Which of the following transactions increases total assets?

a. Purchase of inventory through cash
b. Collection of accounts receivable
c. Payment of accounts payable
d. Provision of capital by the owner
18 Accounting Cycle and Analyzing Business Transactions • NU LAGUNA

12. The business owner’s contributions to, and withdrawals from, the business are recorded as
a. income and expenses, respectively
b. gains and losses, respectively
c. direct additions to, and deductions from, equity
d. not recorded

13. A sale on account increases which of the following accounts?

a. Accounts receivable
b. Sales
c. Cost of sales
d. All of these

14. Which of the following accounts is decreased when a business settles accounts payable?
a. Cash
b. Accounts payable
c. Owner’s capital
d. a and b

15. Which of the following statements is correct?

a. The “cost of sales” or “cost of goods sold” account is an asset account
b. A cash purchase of equipment increases the total assets of an equity
c. Income decreases equity, while expenses increase equity
d. The collection of accounts receivable does not affect the total assets of a business
Accounting Cycle and Analyzing of Business Transactions • NU LAGUNA

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Reference

Millan,Zeus Vernon B., 19th Edition Financial Accounting and Reporting,Bandolin Enterprise

Valix, Conrado T., 20th Edition Financial Accounting and Reporting, GIC Enterprises & Co., Inc

Cabrera, E. and Ocampo Reynaldo Financial Accounting and Reporting Standards and Applications
Volume 3 2014-2015 Edition GIC Enterprises & Co., Inc.