Business Transactions

Business Transactions - date recorded in the accounting

books

Debit & Credit

Transaction - economic activities of the firm
External transaction - involves one enterprise
Internal Transaction - activities w/thin enterprise T-Account - business transaction cause increases and
decreases in the accounting values; to record these changes,

Three Accounting Elements or values

a business firm makes use of the account.
Account - an accounting device used to summarize the
Assets increases and decreases in asset, liabilities, owners equity,
Economic resources owned by the business. Includes; income and expenses of the business.
properties and other things of value of ownership.
Two Group of Assets
Current Assets - assets which can be reasonably converted Name of the Item
into cash w/thin short period of time
Non-current Assets - assets which include; property, plan
and equipment; are tangible assets used in operation of the Left side Right Side
business; have useful life that exceeds one year and not
intended for sale. Left side - Debit (Dr.)
Right side - Credit (Cr.)
Liabilities
Are debts or obligations of the business

Two Classification of Liabilities Debit to: Credit to:

Current or short-term Liabilities are those which are 1. Increase assets 1. Decrease assets
due for payment w/thin a short period of time or w/thin 1 2. Decrease Liabilities 2. Increase liabilities
year from balance sheet date. 3. Decrease proprietorship 3. Increase proprietorship
Include: due tp: due to:
Accounts Payable - indebtedness arising from purchase of - withdrawal of assets by - Investment by the owner
goods & services in the ordinary course of the business. the owner - Decrease in expenses
Notes Payable - short-term indebtedness supported by - increase in expenses and - increase in income
promises to pay/promissory note. losses
Accrued Expenses - already incurred but not yet paid. - decreases in income
Unearned Income - when payments for undelivered goods
or services not yet rendered or received.

Fixed or long-term liabilities are those which mature

Chart Of Accounts
beyond one year from the balance sheet. Assets, Liabilities and proprietorship accounts are also called
Ex. mortgage payable, bonds payable & notes payable. real accounts, balance balance sheet accounts or permanent
Capital - represents the owner’s equity or investments in accounts.
the business. ( Owner’s equity or Proprietorship ) Income & Expenses - nominal accounts, profit and loss
Two major Accounts -Income; special kind of growth in accounts, or temporary accounts.
firm's assets while Expenses; use up the firm’s asset
ASSETS TITLE

Accounting Equation 1. Cash on hand - coins, currency & cash equivalent

Business transaction affects assets, liabilities and owner’s 2. Cash in bank - unwithdrawn deposits in the bank
equity/proprietorship of the business’ 3. Notes receivable - amount collectibles from customers
for goods sold or services rendered on credit or from other
ASSETS = EQUITIES loans.
Equity is the right, claim, or interest of the person over the 4. Accounts receivable - claims from customers arising
assets of the business. from goods sold or services rendered on credit. Represent;
Liability represents; claims in the assets of the business and debtor’s oral promises to pay.
proprietorship is the owners or owner’s interest in the 5. Allowances for bad debts - contra-assets; uncollectible
business. amounts. Deducted from A/R.
6. Merchandise Inventory - goods purchased by the
business to be sold at a profit.
7. Interest Receivable - interest earned on notes; not
received in cash.
8. Supplies Unearned - Misc, supplies which have been
bought for office use but are still unused.
9. Prepaid Insurance - premium; applicable for future
periods
10. Furniture & Fixtures - includes tables, chairs, etc.;
asset owned and used by the business in its operation.
11. Equipment - includes; computer, calculators, cash
register, etc.; similar to assets.
12. Delivery Equipment - transportation merchandise.
13. Accumulated Depreciation - valuation account that
reduces the total cost of the fixed assets; contra assets
14. Land - land owned by the business used for bldg. sites
15. Building - building owned and used by the business

LIABILITIES TITLES Steps in accounting cycle:

1. Journalizing
Notes payable amount due to the creditor supported by 2. Posting
promissory notes. 3. Preparation of trial balance
Accounts payable amount due to creditors for the goods 4. Adjusting the entries
or services bought on credit 5. Preparation of worksheet
Interest Payable interest incurred but not yet paid. 6. Preparation of financial statements.
Salaries Payable amount due to the employee for services 7. Closing the entries
they rendered. 8. Preparation of post-closing trial balance
9. Revising the entries ( for next accounting period. )
PROPRIETORSHIP/OWNER’S EQUITY

Owner’s Capital - capital contribution of the owner to the Journalizing, Journal & Journal Entry
business.
Journalizing - first step in the accounting cycle; process of
Owner’s Drawing - withdrawn by the owner for personal
recording business transactions in a journal.
use.
Journal - book of accounts where businesses transactions
are recorded for the first time; the book of original entry.
INCOME TITLES
Two kinds of journal - general journal and special
Journals.
Sales - total sale of merchandise sold.
General Journal - simplest most flexible journal; two money
Professional Fee Income - earned by professionals;
columns
CPAs, doctors, lawyers, etc. for service rendered
Special Journals - cash receipt journal, cash payment
Rent Income - rental earned
journal; depends on the size and needed for business.
Interest Income - earned for lending money
Service income income earned for services
A general journal contains the ff. columns:
rendered(service concerned business)
Date - date of the transaction; recorded in systematic
EXPENSE TITLES
manner and chronological order
Account Titles and Explanation - contains; debit &
Cost of sales - cost of goods purchased or sold or materials
credit accounts and a brief explanation of the entries.
manufactured and sold
Folio - post reference number or ledger page
Advertising Expense - expenses incurred to promote the
Debit - amount debited
product of the business
Credit - amount credited.
Salaries/Wages - salesmen’s salaries; compensation given
to sales agent
Journal Entry - record business transactions in the
Salesman's commissions - compensation; based on the
journal.
amount of their sales
Salesmen’s travelling expense - travelling allowance
Two types of Journal
given to sales agents.
Supplies expense - amount of supplies used.
Simple Journal - contains only one debit and oje credit
Taxes - duties incurred in the current period.
accounts.
Utilities expense - amount of power/light and water
Compound Journal - contains either one debit and two or
consumed by the business
more credit; two more debits and one credit; two or more
Repair and maintenance - expenses incurred for
debit & credit.
repairing the assets of the business.
Bad debts - estimated amount of losses from uncollectible
Bookkeeping Techniques
accounts of the business.
Note: when recording transactions in the journal or ledger
Depreciation expense - Allocated fixed asset in current
commas and periods are no longer written.
period.

Accounting Period
Going-concern Principle or the Principle of
Continuity. This principle assumes that the business has a
continuous life presentation from the date of its
establishment.

Accounting Period or Fiscal period is a segment of time,

usually a year, in which statements are prepared in order to
gauge the result of the operation in a particular period of
time.

Accounting Cycle
Consist of successive steps starting with the recording of Posting, Ledger, General Ledger, T-accounts
transactions in the books of accounts and ending w/ post-
closing trial balance. Posting - process of transferring the records from the
journal to ledger.
Ledger - constitutes a group of accounts; final book of entry Accumulated Depreciation - contra asset account is an
T-account - simple ledger account where the balance is deducted from a related assets

Adjusting Entries and Accounts to be Adjusted

account to show the proper amount of such asset.

Accounting Period - any length of time in which the life of Depreciation for Fractional Period
the business is divided; monthly, quarterly, manually. If the purchase date of the assets does not coincide with the
beginning of the accounting period; asset should be
depreciated in fraction periods.
Accounts that Need to be Adjusted
1. Adjustments for the expiration of prepayment of Posting the Adjusting Entries
expenses After Adjusting Entries have been recorded in the general
2. Adjustments for realization of income collected in journal, they should be posted to the ledger to adjust the
advance account.
3. Adjustments for accrual of expenses. Adjusted Trial Balance - contains the sum of the trial
4. Adjustments for accrual of income. balance and adjustments; prepared of the accounts to check
5. Provision for bad debts. correctness of debit & credit in the adjusting entries.
6. Provision for depreciation Worksheet - columnar paper which is prepared to facilitate
the preparation of adjusting entries, and financial
statements.

Adjustments for the Expiration of Preparation of

Expenses
Prepaid Expense - expenses paid in advance; at the time
of payment, the account is an asset, and as it is used, it
becomes expense.

Two methods:
Asset Method - original entry made is charged to an asset
Expense Method - expense account is charged when
payment is made.
Income Statement; Income and Expenses
Adjustments for the realization of Income Collected Statement of Financial Position; Assets, Liabilities &
in Advance Capital

Unearned Income arises when the payment is received

before goods are delivered or before services are rendered.

Two methods:
Preparation of financial statements
Income Account - credited when income method is used; Exchange Price or Cost Principle
credited when cash is received. Based on this principle,.assets, liabilities, revenue and
Liability Account - credited when the liability account is expense; recorded at cost or amount agreed; cash equivalent
used; credited upon receipt of cash Accrual Basis of Accounting
Based on assumption, assets, liabilities, revenue and
Accrual of Expenses expense; organized based on the occurrence of the
Accrued Expense - expenses already incurred during the transaction rather than based on cash received or paid.
period but are not yet paid or recorded; at the end of Objectivity
Accounting period, income statement reflects such US Requires that assets must be substantiated by docs; invoice
expense and statement of Financial position should reflect or official receipt
liability account. Conservation or Prudence
Condition of uncertainty; accountant needs to choose bet.
Accrual of Income unfavorable outcome or favorable outcome.
Accrued Income when goods have been delivered or Consistency Concept
services have been rendered but no amount of payment has Under this concept, accounting policies must be applied
been collected. consistently & accounting info must be presented
consistently from one period to another.
Provision for Bad Debts

Bad Debts - loss from uncollectible accounts Financial Statement

Bad Debts or Loss from Bad Debts - should be debited Income Statement - contains the income and expenses of
to show a decrease in the proprietorship account due to the business; shows result of business operation.
estimated loss; valuation account that should be credited Statement of Financial Position - contains assets,
because it is deduction from accounts receivable, an asset liabilities and capital; shows condition of the firm.
account. Statement of Owner's Equity - shows activities that
caused the changes in the Equity of the owner.
Provision for Depreciation Statement of cash flows - shows the cash received and
cash disturbed by the business.
Depreciation - an expense account which is included in
operating expenses. Income Statement Two Forms: single step (list of
expenses deducted from list of revenue to arrive at the result
of operation; profit or loss) & multiple step (from will be Closing Entries - after financial statements have served
discussed in the merchandise concern. their purpose; nominal accounts the income and expenses
accounts to be close.

Posting Trial Balance - after closing all the nominal

accounts, only the accounts remain open; assets, liabilities &
capital.