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TAGBILARAN CITY COLLEGE

College of Business and Industry
Tagbilaran City, Bohol

Course Code ABM101 Instructor Albert A. Arado, CPA, CTT

Fundamentals of
Course Title Accounting, Business E-mail Address aarado.tcc@gmail.com
and Management
Course Credits 3 units Contact Number 0939-741-4153
Course Consultation Mondays to Fridays
Bridging
Classification Hours – 8pm onwards
Consultation
Pre-requisite(s) None Online via MS Teams
Venue

Learning Module 7: Business Transactions and their Analysis as

Applied to Accounting Cycle of a Service
Business Pt.1
Duration of Delivery: September 29 – October 9, 2023
Due Date of Deliverables: October 11, 2023

Intended Learning Outcomes:

 Describe the nature, and give examples, of business transactions.

 Identify the different types of business documents.
 Identify the accounts affected by common business transactions.
 Solve simple problems and exercises in the analysis of business transactions.

BUSINESS TRANSACTIONS AND THEIR ANALYSIS

The Accounting Cycle
The accounting cycle represents the steps or procedures used to record transactions and
prepare financial statements. The accounting cycle implements the accounting processes of
identifying, recording, and communicating economic information.

Steps in the Accounting cycle

The following are the steps in the accounting cycle:

1. Identifying and analyzing business documents or transactions. – The

accountant gathers information form source documents and determines the effect
of the transactions on the accounts.
2. Journalizing – the identified accountable events are recorded in the journals.
3. Posting – information from the journal are transferred to the ledger.
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4. Preparing the unadjusted trial balance – the balances of the general ledger
accounts are proved as to the equality of debits and credits. The unadjusted trial balance
serves as basis for adjusting entries.
5. Preparing the adjusting entries – the accounts are updated as of the reporting date
on an accrual basis by recording accruals, expiration of deferrals, estimations, and other
events often not signaled by new source documents.
6. Preparing the adjusted trial balance (or worksheet preparation) – the
equality of debits and credits are rechecked after adjustments are made. The adjusted
trial balance serves as basis for the preparation of the financial statements.
7. Preparing the financial statements – these are how the information
processed is communicated to users.
8. Closing the books – this involves journalizing and posting closing entries and ruling
the ledger. Temporary accounts (or nominal accounts) are closed and the resulting
profit or loss is transferred to an equity account.
9. Preparing the post-closing trial balance – the equality of debits and credits are
again rechecked after the closing process.
10. Recording of reversing entries – reversing entries are usually made at the
beginning of the next accounting period to simplify the recording of certain
transactions in that period.

The preparation of trial balances and reversing entries represented in steps (4), (6), (9), and (10)
are optional, meaning they are not required in the preparation of financial statements. However,
for best internal control purposes, trial balances should be prepared.
Steps 1 and 2 are discussed in this chapter. The other steps are discussed in the succeeding chapters.

Step 1- Identifying and analyzing transactions and events

This is the first step in the accounting cycle. It involves identifying a business transaction and
analyzing whether or not that transaction affects the assets, liability, equity, income or expenses
of the business.

 Accountable event – transaction that has an effect on the accounts

Examples of accountable events
a. Receipt of cash from a client as advance payment to repair a computer. In this case (asset)
will increase. At the same time, the advances from client (liability) will also increase.
b. The advances from client is a liability because the business has the obligation to render
future service to the client

 Non-accountable event – transaction that has no effect on the accounts

Examples of non-accountable events
a. hiring and termination of employees
b. recognition from the government as most outstanding business
c. death of owner

Transactions are normally identified from “source documents.” Source documents are written
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evidences containing information about transactions. Source documents come in various forms
which include, but not limited to, the following:
a. Sales invoices,
b. Official receipts,
c. Purchase orders,
d. Delivery receipts,
e. Bank deposit slips,
f. Bank statements,
g. Checks,
h. Statements of account, and the like

Illustration: Source Documents

Sales invoice vs. Official receipt

Sales invoices (SI) are used for the sales of goods while Official receipts (OR), are used for
the rendering of services. For example, if you buy groceries, the grocery store will issue you a
sale invoice, if you pay your tuition fee in school, the school will issue you and official receipt.

SALES INVOICE

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OFFICIAL RECEIPT

Purchase order

A purchase order is a document issued by a

buyer to a seller indicating the types, quantities
and agreed prices for products or services that
the buyer intends to purchase.
Purchase orders are prepared as internal
control over purchases.
For example, to prevent unnecessary purchases,
you should require your personnel to prepare
purchase orders for all the purchases of your
business.

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Delivery receipt
A delivery receipt is a document signed by the receiver of a shipment acknowledging the
receipt of the goods.

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Bank deposit slip

A deposit slip evidences a deposit to a bank account. It shows the date of deposit, the bank
account name and number, and the amount deposited.

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Bank statement
A bank statement is a report issued by a bank from a monthly basis that shows the deposits and
withdrawals during the period and the cumulative balance of a depositor’s bank account.

Check
A check is an instrument that orders a bank (drawee) to pay the person named on the check or
the bearer thereof (payee) a definite amount of money from the drawer’s bank account.

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Statement of account
A statement of account is a report a business sends to its customer listing the transactions with
the customer during a period, the payments made by the customer and any remaining balance
due from the customer. A statement of account also serves as a notice of billing.
For example, a school periodically issues statements of accounts to its students reminding them
to settle any unpaid tuition fee.

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Types of events
1. External events – are transactions that involve the business and another
external party. Examples include the sale, purchase, borrowing of money,
payment of liabilities, and the like.
2. Internal events – are events that do not involve an external party. Examples include
production (cooking of barbecue) and casualty losses (e.g., destruction of properties due
to storm, earthquake, and the like).

Step 2 - Journalizing
After an accountable event is identified and analyzed, the second step is to record it in the
journal by means of a journal entry. This recording process is called journalizing.
Date Account title to be debited ₱xx
Account title to be credited ₱xx
short description of the transaction

Rules on Debits and Credits

• The name of the account to be debited is always listed first. The debited account is listed on
the first line with the amount in the left side of the register.

• The credited account is listed on the second line and is usually indented. The credited amount
is recorded on the right side of the register.

• The total amount of debit should always equal the total amount of credit.
The following are the parts of a journal entry:
1. Date – journal entries are recorded in the journal chronologically, i.e., arranged
according to the dates they are recorded.
2. Account titles and Amounts to be debited and credited – under the double-
entry system, each transaction is recorded in the journal in two parts – debit and credit.
3. Short description of the transaction – a short description of the transaction is
provided for future reference.
Simple and Compound journal entries
A journal entry may have one of the following formats:
a. Simple journal entry – one that contains a single debit and a single credit element.
The illustrated journal entry above is an example of a simple journal entry.
b. Compound journal entry – one that contains two or more debits or credits.

On September 7, 2016, Jose purchased various store equipment to be used in the business. The total
cost of the equipment is PHP150,000. The supplier required Jose to pay 30% as down payment, with
the balance payable 30 days after. Notice that you have two account titles, Cash and Accounts
Payable, affected on the credit side.

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The Chart of Accounts is a listing of all account titles used in the business to record all the
transactions. It is arranged according to the order of their appearance in the financial statements.
Refer to Table X.

Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his computer
repair shop on February 14, 2016, naming it Matapang Computer Repairs. Pedro knows that
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business transactions should be separated from personal finances. Thus, he decided to invest
P200,000 in this business. He deposited the amount with Union Bank.

Notice that we have debited Cash, an asset account and credited Matapang, Capital, an equity
account.

February 15, 2016 - Pedro purchased one computer unit from XY Computer Store to be used for the
business. He issued check number 001 amounting to PHP25,000.

Notice that the debit to office equipment increased the asset account and the credit to cash decreased
the asset account.

February 15, 2016 - Pedro entered into a contract with Makisig to maintain the computers of
Makisig for two months starting on February 15, 2016 up to April 15, 2016. On the same date,
Makisig paid the total contract amount of PHP40,000 in full.

General Journal
Date Account Title and Explanation Ref Debit Credit
2/15/2016 Cash 40,000
Unearned Service Revenue 40,000
To record receipt of full payment for the
2-month service contract with Makisig

February 16, 2016 - Pedro hired Juana Magaling, an experienced secretary.

Entry: No entry. This is not a financial transaction.

February 17, 2016 – Repaired the computer of Jean and collected PHP10,000

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February 18, 2016 – Repaired Mike’s computer. However, Mike will pay PHP15,000 on March 18,
2016

February 19, 2016 – Pedro purchased Office Supplies from MM Merchandise amounting to
PHP5,000 on account. Pedro will pay this on March 30, 2016.

February 25, 2016 – Paid the salary of Juana amounting to PHP4,000

Step 3 – Posting

Posting, the third step in the accounting cycle, is the process of transferring data from
the journal to the appropriate accounts in the ledger. The summary (in specialized journals) or
individual transactions (in the general journal) are then posted from the journals to the general ledger
(and subsidiary ledgers). More specifically, posting is done by transferring the amounts of debits and
credits in a recorded journal entry to the ledger accounts. Nothing should ever get posted to the
ledgers without first being entered in a journal.
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The purpose of posting is to classify the effects of transactions on specific asset,

liability, equity, income, and expense accounts to provide more meaningful information.

Recall the lesson on the general ledger. We will now post the previous transactions of Pedro to the
general ledger. For purposes of discussion, we will be using the three-column ledger.

General Ledger
Account: Cash Account No.: 1000
Date Item Ref Debit Credit Balance
2/14/2016 Investment of Owner 200,000 200,000
2/15/2016 Purchase of Computer 25000 175,000
Receipt of full payment for the 2-month service
2/15/2016 40,000
contract with Makisig 215,000
2/17/2016 Repair income - Jean 10,000 225,000
2/25/2016 Payment of Juana Salary 4,000 221,000

General Ledger
Account: Unearned Service Revenue Account No.: 2400
Date Item Ref Debit Credit Balance
Receipt of full payment for the 2-month service
2/15/2016 40,000 40,000
contract with Makisig

The “Unearned Service Revenue” account was not included in the given Chart of Accounts.
Additional account titles maybe added to this chart if the need arises. Unearned Service Revenue
will fall under the liabilities c

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References:
 Financial Accounting and Reporting (Fundamentals) by Zues Vernon B.
Millan
 Lopez, R. (2016). Fundamentals of Accounting (Simplified Procedural
Approach). MS LOPEZ Printing and Publishing
 Valix, C., and Valix, C. (2019). Practical Financial Accounting 1. GIC
Enterprises & Co., Inc.
 Financial Accounting. Merchandising Operations (n.d.) Retrieved from
http://www.youtube.com/watch?v=ySVzjrPh-J4
 The Chart of Accounts. (n.d.). Retrieved from
http://www.accountingtools.com/chart-of-accounts-overview
 Accounting Cycle. (n.d.). Retrieved from
http://www.investopedia.com/terms/a/accounting-cycle.asp
 Nickolas, Steven. What is the distinction between Free on Board (FOB)
shipping point and destination? (n.d). Retrieved from
http://www.investopedia.com/ask/answers/052515/what-distinction-between-
free-boardfob-shopping-point-and-destination.asp
 Valencia, et.al. (2010). Basic Accounting 3rd ed. Valencia Educational
Supply.
 Weygandt, J. et. al. (2012). Accounting Principles 10th ed. John Wiley &
Sons (Asia) Pte. Ltd
Albert Arado, CPA, CTT