CHAPTER 3 Recording Business
Transactions
STEP 1- TRANSACTION ANALYSIS
Accounting Cycle – refers to a series of
sequential steps or procedures performed to
accomplish the accounting process.
1. Identification of Events to be
Recorded
- To gather information about
transactions or events
generally through the source
documents.
2. Transactions are recorded in the
Journal
- To record the economic
impact of transactions on the
firm in a journal, which is a
form that facilitates transfer
to the accounts.
3. Journal Entries are Posted to the
Ledger
- To transfer the information
from the journal to the ledger
for classification.
4. Preparation of a Trial Balance
- To provide a listing to verify
the equality of debits and
credits in the ledger.
5. Preparation of the Worksheet
including Adjusting Entries
- To aid in the preparation of
financial statements.
6. Preparation of the Financial
Statements
- To provide useful
information to decision-
makers.
7. Adjusting Journal Entries are
Journalized and Posted
- To record the accruals,
expiration of deferrals,
estimations and other events
from the worksheet.
8. Closing Journal Entries are
Journalized and Posted
- To close temporary accounts
and transfer profit to owner's
equity.
9. Preparation of a Post-Closing
Trial Balance
- To check the equality of
debits and credits after the
closing entries.
10. Reversing Journal Entries are
Journalized and Posted
- To simplify the recording of
certain regular transactions in
the next accounting period.
JOURNAL
- The journal is a chronological
record of the entity's
transactions.
- A journal entry shows all the
effects of a business
transaction in terms of debits
and credits.
- A journal is called the book
of original entry.
- The general journal is the
simplest journal.
Simple and Compound Entry
- In a simple entry, only two
accounts are affected-one
account is debited and the
other account credited.
- When three or more accounts
are required in a journal
entry, the entry is referred to
as a compound entry.
STEP 2- TRANSACTIONS ARE
JOURNALIZED
- After the transaction or event
has been identified and
measured, it is recorded in
the journal.
- The process of recording a
transaction is called
journalizing.
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.
LEDGER
- A grouping of the entity's accounts is
referred to as a ledger.
- A general ledger is the "reference
book" of the accounting system and
is used to classify and summarize
CHART OF ACCOUNTS
transactions, and to prepare data for
basic financial statements.
- The accounts in the general ledger
are classified into two general
groups:
1. Balance sheet or permanent
accounts (assets, liabilities and
owner's equity).
2. 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.
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.
 Balance Sheet Accounts
Assets
110 Cash
120 Accounts Receivable
130 Supplies
140 Prepaid Rent
150 Prepaid Insurance
160 Service Vehicle
165 Accumulated Depreciation
170 Office Equipment
175 Accumulated Depreciation

Liabilities
210 Notes Payable
220 Accounts Payable
230 Salaries Payable
240 Utilities Payable
250 Interest Payable
260 Unearned Referral Revenues

Owner's Equity
310 Besario, Capital
320 Besario, Withdrawals
330 Income Summary
Income Statement Accounts
Income
410 Consulting Revenues
420 Referral Revenues

Expenses
510 Salaries Expense
520 Supplies Expense
530 Rent Expense
540 Insurance Expense
550 Utilities Expense
560 Depreciation Expense- Service Vehicle
570 Depreciation Expense- Office Equipment
580 Miscellaneous Expense
590 Interest Expense
STEP 3- POSTING
- Posting means transferring the amounts from the journal to the appropriate accounts in
the ledger.
- Debits in the journal are posted as debits in the ledger, and credits in the journal as
credits in the ledger.
STEP 4- 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.
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.

- The 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.