ye emt dir Anal 169 Chapter 6 Business Transactions and their Analysis [Foarning Objectives entity the different types of business documents 3. Identify the accounts affected by common bus ‘The Accounting Cycle The accounting cyele represents the steps or procedares record transactions and prepare financial. statements. fccounting cycle implements the accounting procestes ‘dentitying recording, and communicating economic informa ‘Steps in the Accounting cycle ‘The following are the steps in the accounting cycle: 1 Adeatiying end ~The accountant gathers information from source docu land determines the eect ofthe transactions on the accu = the identifed accountable events are 1 3. Posting information from the journal are transfered to ledger 4. Preparing the unadjusted tral balance ~ the balances of general lelger accounts are proved as tothe equality of land credits. The unadjusted tial balance serves as basis ‘dusting entries, lysing business documents or transactions. cparing the adjusting entries ~ the accounts are updated as ‘of the reporting date on an acervl basis by recording accruals, cespiration of deferrals, estimations, and other events often not signaled by new source documents Preparing the adjusted trial balance (or worksheet Preparation) ~ tho equality of debits and credits are rechecked after adjustments are made. The adjusted tral balance serves as basis for the preparation of the Financial statements Preparing the financial statements ~ these ae the means by ‘Which the information processed i communicated to users Closing the books ~ this involves journalizing and posting losing entries and raling the ledger. Temporary accounts (or nominal accounts) are closed and the resulling profit or losis transferred toan equity account Preparing the postclosing trial balance ~ the equality of bits and credits are again rechecked after the closing process, Recording of reversing entries ~ reversing entries are usally made at the beginning of the next accounting. period to ‘simplify the recording of certain transactions in that period. Summary ofthe steps in the accounting cycles Unadjusted rat balance Adjusting entries ‘Adjusted til balance andlor Workshet) Financial statements CConing entries Pst-clsing ial balance1 [ ow Step #2: Journal entry | ‘The compound joural entry to record the transaction sas ps Fmencins a tr Analis 193) #21: Acquisition of asset Equipment January 25,20, the business acquires a machine for ¥20,00. gum entry to record the transaction sas fallow: Tim | Building 0007000, 22, | Transportation equipment 500,000, ‘Owner's capital Altematively, the transaction above can be ‘through simple journal entries as follows ‘Machinery oT) Cash: 20,000 prend Amecetinifeiie 4 ve Cavemen aountmay be wns ute Machinery oun The effect of the curent transaction on the basic accounting ‘equation is analyzed a follows Both the entries above, compound and simple, are acceptable © The effect of the current transaction on the basi acc ‘equation is analyzed a follows: a Building 000000 Temaperaion eae Ta isu = 9 Tex | Bling 10000 fine mmo | 20 | Owners capi 1 mom = __o 2 octet er cnt het Gee eae Tas [ Transportation equipment S00 ; < Bi] Ownerscaptal Notice again thatthe accountng equation remains balanced ch time a transaction is recoded. use £2.2: Acquisition of asset Inventory (Cash basis) January 25, 20x, the business acquires inventories fr P50,000 he 1 joarmal entry to recon the transaction is 25 fellows: | laversory 50,000 5 | Cash 50.000 Bes |e emo ty 1 The effect of the currant transaction on the base accounting ‘equation i analyzed as follows12. JOURNAL om ins rats nd he Ars 183 sent) and simoltancously a decrease in another asset (i, ecrease in cash). Date count tiles Debit Tout | Bguipment— Barbecue gi 1,000 Equipment Cooking accessories | 120, Equipment Beach umbrela 00) “Transaction 2: Acquisition of inventory (Cash gs 9 “The business purchased inventory for P80 cash. emo the a Sp 1: Transaction analysis Adina analy upmont (se, barbecue ll, cooking accesories and ‘umbrella s debited because these ave the assets that the bus has obtained, “value received.” > Cash is credited because this Hn the asset goon ap in order ‘obtain the equipment, “value parted with” The joural entry above Is an example of “comy fournal entry” because thas more than one debit, © The effects of the entres above on the basic accom Equipment =H gt TCoaking ‘mii [Notice that the acquisition of eqapment through pay ‘of cash didnot affect the total asses, This ts because transaction is recorded axa increase fe asset (Le, increase payable Accounts ventory” (asset) and "Cas (set) Effects on | Tnvenvony Is increased; Cash is decreased. } Debit Credit, | Asset wincreascd rough debitand | Secreased though credit. Step #2: Journal entry ‘The purchase of inventory ls recorded as follows: JOURNAL, Date count tities Debit | Credit Tos 0c [Taventory 480) Cash 0 tad i aun fo Adina anaes Inventory is debited because this the asset obtained, wile cach | Credited because this i the asct giver up kn order 10 obtain the inventory, You may alo want to thik of his way: "When you purchased inventory, your inventory. intense. Inventory isan asset account and recall hat an ase is increased ‘by dabiting it Therefore, to revord an increase in inventory, you red debit the ventory account “= When you paid for the inventory purchased, your cath decreased Conk oan asset account and recall aghin that an asset Is‘The preparstion of trial balances and reversing ent resented in steps 4), (6), 0), and (10) are opto, meaning fre not required in the preparation of financial statemi However, for best internal control purposes tral balances be prepared, ‘Step 1 and 2 are discussed in this chapter. The other are discussed in the gucoeeding chapters invoice vs. Official receipt invoices (SI) are used forthe sale of gas while Oficial recip ) are used forthe rendering of secices. For example, if you Duy ries, the grocery store will ise you a sale noo; you pay tifying and analyzing transactions and events Tiss the first step inthe accounting cycle, It involves identi 4 business trandaction and analyzing whether or not transaction affects the assets, ability, equity, income or ex ofthe business ‘A transaction that has an effect on the accounts 16 “accountable cent,” which needs to be fecorded in the books Accounts. On the other hand, a transaction that has no effect on| ‘accounts 83 “hor accountable cent,” which isnot recorded books of accounts Transactions ate normally identified from “50 documents." Source documents are writen evidences conti Information about transactions. Source documents come Various forms which inelude, but not limited to, the following: Sales invoices, Official receipts, Purchase orders: Delivery receipts Bank deposit sips: Bank statements Checks, Statements of account, and the lke yeseeege|A purchase order is a document issued by a buyer to a indicating the types, quantities and agreed prices for produ services thatthe buyer intends to purchase. Purchase orders prepared as internal control aver purchases For example, to prevent unnecessary purchases, should require your personnel to prepare purchase orders foe the purchases of your business, Trae ond te Anais176 oun pt Tet ke A 1m Bank statement ‘bank statment report sed by a bak (ona monthly b that shows the ceposits and withdrawals during the period the cumulative balance ofa depositors bank account, statement of account [A statonont of account is» report a business sends to is customer isting the transactions with the customer daring a period, the payments made by the customer and any remaining Balance due Irom the customer. A statement of account alba serves a8 a notice of iling For example, a school periodically Issues statements of ‘accounts toils students reminding them to settle any unpaid Pinta CagaaNasy amonasses asa ‘A check isan instrument that orders a bank (dues) to pay person named on the check or the bearer thereof (puye) a def mount of money from the drawers bank account.198 > Elects on Accounts receivable sehen accounts: isnerease > Comtof sles is increased: Inv decrensed. Assets increased through debit ‘decreased through cet > Income is increased through Expenses increased throu Stop $2: Journal entry “The Journal entries to record the transaction are a follows: Mar Account receivable wot aoa | Se wor |Comtof sale 20000 sh | benny Liat ote at | © The effect of the current transaction on the basic acco squation i analyzed as follows: [asses acres + ou) 199 “Debit Credit | Asset ninereosed through debitand decrazad through credit Sey 82: Jour entry journal entry to record the transaction is as follows Cash 10,000 “Accounts receivable 0,000 ‘emt tom fmnrete | [Notice that income (i, sal) is recognized on March 4, 20xt (Ley date of sale) rather than on March 8, 20x1 (Le. date of ash colction), This isin accordance with the accrual basis of sccounting. 4 The effect of the transaction on the basic accounting equation is analyzed as follows: cat 000 ‘Acountsmecible G00) = “ASSETS = LIABILITIES + EQUITY Accitt gua = aan Irene a) = . ote (Case 4.28; Collection of accounts recetoable (On March 8 20x1, the business collects 80,000 receivable |& The net effect of Case #424 and 4.28 is analyzed using the expanded accounting euation 25 follows: [e000 + +E + INCOME - EXPENSES 0000 ° o 20000 ASSETS = 000 = 0 + 0 + soy i= 0+ GeO 0+ 80000, 0,000 ‘Step #1: Transaction analy Accounts Cash” (assetjand “Acounts weaaval fete (esse) (0,000) 0 a0 = tse on| (Cosh is increase. Accounts receivable accounts: __| decreased.Note the following, parts of a journal entry: (1) Date, Accounts and wnounts debited and’ credited, and (3) ‘escrpion of the transaction & Theeffects ofthe entry above on the basic accounting equ are analyzed below: ASSETS 7 » [Goons] Ore cal— ‘Transaction #2: Loan “Thebusiness obtained loon of PI 200. Gas) and Notes pays iabilty) ‘Cash is increased; Nols payable increased. a ‘Acet einereased through debit L isincreased rough credit Debit / Creat Step 2: Journal entry The business lori econted a allows a ‘Observe thatthe equality ofthe basic accounting equation Is maintained au each transaction i recorded, This isin accordance vith the concept of duality and equim. nsaction #%: Capital expenditures ‘The business acre the following for cash tem description ost Borbecue grill 1,000 Cooking acessories 120 each umbrelia 00 "The items acquired are considered “cpa expentiturs” Aor “emit assets") because they willbe used fora period longer Thon one year Capital expenditures are recorded a6 assets rather thn expenses, Stay £1: Transaction analysis "Equipment (asset and "Cask (asset) Both the journal entries above are examples of “sim Journal entries” because they have single debitsand credits. © The etfcts of the entries above on the basic accounts uation re analyzed below JOURNAL, | Bape erased aah decreased Dae coin les eta joan | Sob. 1200. “Asset is increased through debit and Notes payable ‘Secrnsad through edi on i os RT = a Sp 2: Journal etry The acquisition of equipment is recorded as follows:190 our Iustration 3: Non-accountable events ‘AL You are planing to purchase new equipment in the You have not yet placed an order forthe new equlpm because you don't have the money’ yet ss have the following recording dels ave 1.1 Deitel investment in cash January 1, 20x1, the owner invests P100,000 cash to the Slop #1: Transaction analy > Accounts ‘None. Amare plan to purchase dows a ete: silt the accounts ofthe busines entry to record the tansacton iss follows [> etfects on | None ‘a0 accounts i, | Ovners capita 100.000 abit /creaie | None en Mikes Step £2: fra entry noc toate [No journal entry shall be made because the transaction ism accountable 1¢ The fect ofthe transaction on the Basle accounting equation Isanalyzed a5 ‘AST = Your dog, “Buoy,” did because he ate a barbecue stick Step #2. Transaction analyse 4 Cant son = Accounts "None. The event does no afect any of ected _ | accounts of the business. 5 Bllects on None Debit Cree Gave #1.2: initia investment in non-cash assets [On January 20, 201, the owner provides a building valued at 11,00,000 nd an atone valid at P300,000 to the busines. “io #1: Transaction anatsie Step 2: ural entry = “Building” (esse), “Transportation [No journal entry shall be made because the transaction i aeaoe eclipses endear cag sacountable, aout > Efieas on Building and Transportation equipavent accounts are increased Owner's capital is increased, dl Debit] Credit. [Assets increased tough debit. Equity is increased through credwa om pins Thm Anis 3 Delivery receipt \ [A daliery rcpt Is 9 docement signed by the receiver of shipment acknowledging the rest ofthe goods. DELIVERY REC nk deposit stip Mist slp evidences» deposi 9 a bank account shows the eof epost the bank account name and mumber, and the cunt deposed. @retrobank _ PEeeemy : (3)4l4 8/1 12i7/413\(6| [=== GEORGE E. PAWN184 ou Iilstration 2 Journal entries - Operations Your barbecue operations started on January 2 201. The following were the business transactions on this date: decreased by crediting it. Therefore, to reson docrste in {you need to ere the ash account. © The effects of the entries above on the basic account ‘equation are analyzed as follows Transaction 45: Sale “oval cash sales of barbecue amounted to P7O0. The total cost of the barbecues sold is P28, Sig #1 Tramacton mr > Accounts > "Cash? asba)ana Sales” (income, yale atc | > cost “of sales” (expense) and = | inner taventory” asset) neon 1.000 Elles on, Cash is inereused: Sales i frereased Cooking accounts Cost sales is tereased:lewentory Is aoe 0 Debit] Cree ‘Asst isinereased through debifand | co oe ee esse gh ca | > Income increased through credit 2 Expone ie nereasod throwigh debit Totate Sp #2: Journal entry Et asl are recorded os follows: JOURNAL, Date ‘count tes Debit | Credit T2200 | Cah, 700) ‘Sales 700, Temonbor te floeingy The intial iovestment by an owner tothe business fs record as debit to the asset contributed (eg. "Cash*) and eredit to ‘auity scour called “Owmer’s capita” Recaps of cash are debited to the “Cash” account, _payments of exsh are credited tothe "Cash account. Aine cont of ales is recorded a follows: JOURNAL, Daie count titles Debit | Cree Tri | Coat of goods sold 280 - Tver 2) Sa RS TS| | 200, ‘co Case 85: Expense ~ Paid in cash) (On March 21 20, the Busines pays P5,00 for an advert that was ared on the dio. “The jour entry to reord the transaction sa follows Mar] Advertising expense 5.000 Cash © The effect of the curent transaction on the basic acco ‘sation is analyze as flloen BOUNTY Case #6: Owners daveings ‘On April 7, 2041, the owner makes temporary withdrawal 110,00 cash from the busines, Sty #1: Transaction anase pied & Acsouns | “Oval drawing Conia SIFT tected Coa (asset) Eee | ‘Owners drawing ie hreased. Cash is accounts decreased Debit / Credit | Contra equity increased through 2 Aebit Asset is decreased through 1 “The “Owner's drawings" account is closed to the “Os capital” account, as a direct deduction, at the end of ‘accounting period. Thus, the “Owner's drawings” sccoint is for aeount 0 an ety acount Ge, coma eg “If equity ip increased through credit then contra equity ‘increased through debi (Le, the oppo). o ora ty 25 fllows ae «squation is analyzed as fallow Assers = Cash.) = Chapter 6 Summary: + The accounting cycle wepresents the eps or accounting procedures used to record trantactions and. prepare financial Step o The effet ofthe eurent transaction on the baste accounting, EQUITY eee | ‘ooo pa the acouting cycle: Identity and analyzing, Journalizing Poxt B Unadjssted trial Balance ‘Adjusted trial balance (andr worksheet) Financia statements Closing ents Fit cloning Wal alana + Only, “accoalernie™ are wecorded tn the accounting ruconds. "Accountable evens” are those that affect he accounts + Types of events: (a) External nets ~ involve the business and another exeral party, (b) Inert eons ~ involve the business onl c 1 2 B 5. Adjusting entriesra “Types of events Penn Trams on hi Ans 1” ‘Simple and Compound journal entries IAjournal entry may bane one of he following formats Simple ural ery ~ aoe that contains a single debit and a Singer element The tated journal etry above an xample of neuter 2 Internat events ae events that do mi involve an et pty Examples inde prion coking bate) compo uraetry ets contains eo oF mor debits Canty tne ( detacton of propre die fo rowing carhquste andthe ike) Iostation 1: Jounal ens - Sap ges . Int iene, we wil acs how to St up the accountng ‘After an accountable event i identified and analyzed, the ‘step isto wecord it in the journal by means ofa jours etry. recording process ealled juris cords ofa tart upbusiness ‘You open» barbecue stand on January 1, M1. The Jollowing were the business transactions on this date Transaction #1: ital investment Journal entry ‘jou utry bs he lowing format: nr provided PAD cash il nvestmentto your business Date | Acount ite tobe debited] Pio eee “Account ile ob cei Se ox: ylang ae dig meee PRL sccoms Tea aad “Owners pial” ‘Thefollowing are the parts af ajournal entry: oct equi) > tifects on ‘Cash is nerensed; Owner scapitals account fncroased. : ‘Debit / Credit | Asst ininreased through debit Euity is | incense through eed Date uma entries ate recorded inthe jou chronologically, Le, atranged according to the dates they. recorded Sey #2: Jura entry Account titles and Amounts to be debited and cred el ‘Your initial investment is recorded in the journal as follows: ‘under the double-entry system, each transaction s recorded. ‘he journal two parts eit and re. JOURNAL Short description of the transaction — a shoetdesciption Date count titles Debit joe ac | Cah = ‘Oona capil the transaction is provided for fare reference.pesins Tremaine Anis 197 tt i a ert ec ou ent ame [= a ee : eT Ne cs tm cs SSS e ee cae : ee eee is ren eee : Sess ea "2 ee ae oad See ; eae ona Bios __wo fs eer : a purchased is initially recorded as asset (ie, inventory) pone - Spee ee eee Bae oral = period where sales revenue is recognized ‘Observe that “sales” (income) increases equity, while “cost of ses” (expense) decreases esl: © ‘The effects of the entries above on the basic accou ‘sjuaton are analyzed a follows: 4 We can also use the expand acounting equation to analyze the effects of the entries: "aint begining tyExpense is increased through debit, | is decessed tough ered: rn rst ond th Ane 189 Se T= unas +r eee foun ta = | tae ‘ “icy um Como || oath Additional analyses: supplies © The efits of the entries abowe on the basic a uation ae analyzed as follows: Sty 2: rey ‘o oe 5 Scenes eens ee JOURNAL: Sees 0+ ta Bat ere Bai pee spate s ma ‘Cah z.. oo | a+ San rs ‘Observe tha the equaity of the accounting equation hes maintained sl Uaroughout ovr rcoeding process. expanded accountng uation LUABILTTES + EQUITY + INCOME. - EXPENSES eee ee) ‘Sum of econ of pentoldand Polen ean r20 P30,iTrip 195, y #1: Transaction analysis Accounts Accounts payable” (Habiliy) and “Cask” Lsitecteds | (asset) ifests on ‘Accounts payables decreased. Cash accounts decrease Ds ibility edcreased Uwough debit. Ast jorensed through erat > Case #2:3A: Aguisition of asset Inventory (On account! Cre (Om January 27, 20x, the business purchases inventories wo 170,000 an account ocr Stay #1: Transaction anal Accounts affected: | “Inventory” (asset) and "Accounts | payable” dhabiiy) — Elects on Inventory is iereased: Accounts pay cco in neronsed, Debit/ Credit | Assets increased through debit Liability is inerensed dough credit ep 2: urna entry nly to recon the transaction is 3s fllows: |¢ ‘The effect of the current transaction on the basic aecounting equation analyzed as follows: co ances wounY Step #2: joa entry cin RE cho + 8 “Tha journal entry ta record the transaction sas oom: aa rome OO Inventory 7.000 a 2 ‘Accounts payable 704 ro ig fi Case 23.1: Liability ‘On February 1, 20, the business obtains a bank lan of P00, 000. ‘& The effet of the current transaction on the basic account squation is analyzed a allows: ‘ASSETS = MASTERS ‘The journal wiry to record the transaction is. lows: a eee es e vee ae oa | & The effet of the curent transaction on the accenunting equations shown below Case £2.38: Payment of accounts payable (On January 31, 20x, the business ets the ¥70:000 [pyle from the January 27 purchase.[ASSES = ——IABILITTES + tol Cash $0000 = Notes payable smn + | See | contre ieee Bet een | ec ae Case 2.2: Payment ofa laity (Om March 1, 201, the business makes 2 portal payment {940,050 on he bane oan “The effect ofthe current transsction on the base acounting i f | sey 1: Pramactin ents Thunton analyzed os follows > hecanis Ns aya” (abi) and "Can peers pee seat (cat) xogeTs = UABIETTIES “EQUITY $Eiecs on] Notes payables decreased Ca ia fe am Een a counts decreased Pos tm a Ett | | FEBS creas | Labi daca rough ati — same "| aeresed though creat ecll thal income (e.g. sales) increases equity, while expenses (ont of sales) decrease ely ‘Stop #2: ural etry "The jourmal entry to record the transaction is as follows: 4¢ The cffect ofthe transaction on the expadal accounting epuation Mir Nols payable sam Franalyzed a follows 2 gs TM MP ef me RSsetS_= Ls + INCOME OPENS, : pos = ae rs 7o0a00 =O © The atict of the current teanaaction on the account oom = + sie > Seto: ‘equation shown below 70 + 700565 - 36000 : ASSETS = ABILITIES + FO Gash (400000) = Notes payable (400000) + ‘Coxe 24:24 Income Credit ale (Sale om account) Ge March 4201, the business makes a sale on account of pon.0, The tle price ie collectible on Merch 8,201. The cost of the inventories sod is ¥20,00. Case 24.1; ncome~ Cash sate ‘On March2 20, the business makes a enah sale of P100,00. ‘cast of the inventories so s P3000. sep #1: Frntation mate 9 Sc Accounts > “Aecounts recevabie™ (ssl) and atecte Sales” (incom > "Cost of tales” (expense) and Iaverory” (asset) “The joumaleisies to record the transaction are a follows: