LESSON NUMBER 05

FUNDAMENTALS OF ACCOUNTANCY,
SUBJECT
BUSINESS AND MANAGEMENT 1
ACTIVITY TITLE STEPS IN ACCOUNTING CYCLE OF A SERVICE
BUSINESS: ANALYZING BUSINESS
TRANSACTIONS
LEARNING TARGET/S  Analyze common business transactions using the
rules of debit and credit
 Solve simple problems and exercises in the
analyses of business transaction
REFERENCE(S)  Fundamentals of Accountancy, Business and
SOURCE(S) Management 1 by Vibal

AUTHORS  Joy S. Rabo, et. Al

DEFINITION OF ACCOUNTING CYCLE

The accounting cycle is a series of

recurring accounting steps or processes
that span from the start to the end of a
particular accounting period.
STEPS IN THE ACCOUNTING CYCLE :

5. Journalizing and posting adjusting journal entries

4. Preparing trial balance

3. Posting journal entries to the ledger

2. Journalizing the business transactions

1. Analyzing business transactions

STEPS IN THE ACCOUNTING CYCLE :

10. Journalizing and posting reversing journal entries

9. Preparing post-closing trial balance

8. Journalizing and posting closing journal entries

7. Preparing financial statements

6. Preparing adjusted trial balance

STEPS IN THE
ACCOUNTING CYCLE OF
A SERVICE BUSINESS
ANALYZING BUSINESS
TRANSACTIONS (Step 1)
STEP 1. Analyzing business transactions

Transaction analysis involves three simple steps. These are:

1. Classify whether the transaction is a financial or a non-financial

transaction. If the transaction is non-financial, then there is no
need to proceed to step 2.
2. Identify the major account/s and the specific account title/s
affected and determine its/their normal balance/s. (either
debit/credit).
3. Determine its/their movement (either debited or credited).
STEP 1. Analyzing business transactions

Normal
Increase Decrease
Balance
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Owner’s Equity (net) Credit Credit Debit
• Owner’s Capital Credit Credit Debit
• Owner’s Drawing Debit Debit Credit
STEP 1. Analyzing business transactions

Normal
Increase Decrease
Balance
Revenues Credit Credit Debit
Expenses Debit Debit Credit
Contra-valuation
accounts:
• Allowance for
Doubtful Credit Credit Debit
Accounts
• Accumulated Credit Credit Debit
Depreciation
 JM Photocopying Center
Chart of Accounts
Assets Owner’s Equity
101 Cash 301 Mercado, Capital
Before we proceed with 112 Accounts Receivable 302 Mercado, Drawing
the first step of the 112b Allowance for Doubtful Accounts 399 Income Summary
accounting cycle, let us
first establish the 113 Notes Receivable
following chart of 114 Interest Receivable
accounts of the business,
122 Office Supplies
which will be very helpful
in identifying the affected 123 Prepaid Rent Revenues
accounts in our 151 Photocopying Equipment 401 Photocopying Revenues
transaction analysis:
152 Accumulated Depreciation – 402 Interest Income
Photocopying Equipment
153 Furniture and Fixtures 499 Other Income
154 Accumulated Depreciation – Furniture
and Fixtures
199 Other Assets
Chart of Accounts continuation …

Liabilities Expenses
201 Accounts Payable 501 Taxes and License Expense
202 Notes Payable 502 Salaries Expense
203 Salaries Payable 503 Supplies Expense
204 Income Tax Payable 504 Utilities Expense
205 Interest Payable 505 Rent Expense
208 Unearned Photocopying Revenues 506 Depreciation Expense
212 Mortgage Payable 507 Doubtful Accounts Expense
215 Loan Payable 512 Interest Expense
299 Other Liabilities 599 Other Expense
STEP 1. Analyzing business transactions

Example:
TRANSACTION 1:
Mr. Mercado invested cash of Ᵽ30,000 in his business to be
known as JM Photocopying Center.
1. The transaction is a financial transaction.
2. The major accounts affected are asset and owner’s equity. More
specifically, the account titles affected are Cash (debit) and
Mercado, Capital (credit).
3. The account to be debited is Cash and the account to be credited
is Mercado, Capital for Ᵽ30,000.
STEP 1. Analyzing business transactions

Example:
TRANSACTION 2:
JM Photocopying Center purchased bond papers, ball pen, and other
supplies to be used in their office on account amounting to Ᵽ10,000.

1. The transaction is a financial transaction.

2. The major accounts affected are asset and liability. More specifically, the
account titles affected are Office Supplies (debit) and Accounts Payable
(credit).
3. The account to be debited is Office Supplies and the account to be
credited is Accounts Payable for Ᵽ10,000.
STEP 1. Analyzing business transactions

Example:
TRANSACTION 3:
The business paid their rent for three months in advance amounting to
Ᵽ45,000.

1. The transaction is a financial transaction.

2. The major account affected is asset. More specifically, the account titles
affected are Cash (debit) and Prepaid Rent (debit).
3. The account to be debited is Prepaid Rent and the account to be
credited is Cash for Ᵽ45,000.
 EXERCISE
Instructions:
Analyze each business transaction. Use the three steps in analyzing
the business transactions.
STEP 1. Analyzing business transactions

Transaction No. 1
The owner invested Ᵽ500,000 cash to start his business.

1. The transaction is a financial transaction.

2. The major account affected are asset and owner’s equity. More
specifically, the account titles affected are Cash (debit) and
Mercado, Capital (credit).
3. The account to be debited is Cash and the account to be credited
is Mercado, Capital for Ᵽ30,000 .
STEP 1. Analyzing business transactions

Transaction No. 2
JM Photocopying Center purchased Ᵽ10,200 worth of bond
papers, ball pen and other supplies in cash.

1. The transaction is a financial transaction.

2. The major account affected is asset. More specifically, the account
titles affected are Office Supplies (debit) and Cash (debit).
3. The account to be debited is Office Supplies and the account to be
credited is Cash for Ᵽ10,200 .
STEP 1. Analyzing business transactions

Transaction No. 3
The business borrowed money in a bank amounting to Ᵽ100,000
to be paid after three years.

1. The transaction is a financial transaction.

2. The major accounts affected are asset and liability. More
specifically, the account titles affected are Cash (debit) and Loan
Payable (credit).
3. The account to be debited is Cash and the account to be credited
is Loan Payable for Ᵽ100,000 .
STEP 1. Analyzing business transactions

Transaction No. 4
The business paid their accounts payable amounting to Ᵽ20,000 .

1. The transaction is a financial transaction.

2. The major accounts affected are asset and liability. More
specifically, the account titles affected are Cash (debit) and
Accounts Payable (credit).
3. The account to be debited is Accounts Payable and the account to
be credited is Cash for Ᵽ20,000 .
STEP 1. Analyzing business transactions

Transaction No. 5
The business rendered services to a client on account, Ᵽ43,700 .

1. The transaction is a financial transaction.

2. The major accounts affected are asset and owner’s equity. More
specifically, the account titles affected are Accounts Receivable
(debit) and Photocopying Revenues (credit).
3. The account to be debited is Accounts Receivable and the account
to be credited is Photocopying Revenues for Ᵽ43,700 .
STEP 1. Analyzing business transactions

Transaction No. 6
The business paid electricity amounting to Ᵽ5,000.

1. The transaction is a financial transaction.

2. The major accounts affected are asset and liability. More
specifically, the account titles affected are Cash (debit) and
Utilities Expense (debit).
3. The account to be debited is Utilities Expense and the account to
be credited is Cash for Ᵽ5,000 .
STEP 1. Analyzing business transactions

Transaction No. 7
The owner withdrew Ᵽ10,500 for personal use.

1. The transaction is a financial transaction.

2. The major accounts affected are asset and owner’s equity. More
specifically, the account titles affected are Cash (debit) and
Mercado, Drawing (debit).
3. The account to be debited is Mercado, Drawing and the account
to be credited is Cash for Ᵽ10,500 .
STEP 1. Analyzing business transactions

Transaction No. 8
The business received Ᵽ20,000 from a customer on account.

1. The transaction is a financial transaction.

2. The major accounts affected are asset. More specifically, the
account titles affected are Cash (debit) and Accounts Receivable
(debit).
3. The account to be debited is Cash and the account to be credited
is Accounts Receivable for Ᵽ20,000 .
STEP 1. Analyzing business transactions

Transaction No. 9
The business paid its full-time employees, Ᵽ30,000.

1. The transaction is a financial transaction.

2. The major accounts affected are asset and owner’s equity. More
specifically, the account titles affected are Cash (debit) and
Salaries Expense (debit).
3. The account to be debited is Salaries Expense and the account to
be credited is Cash for Ᵽ30,000 .
ZYBEL F. ROSALES
Facebook/Messenger: Zybel Fajardo Rosales
Mobile Number:
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09617716313 Smart
Email: zyfrosales@gmail.com