BOOKS OF ACCOUNTS AND

BUSINESS TRANSACTIONS AND

THEIR ANALYSIS AS APPLIED TO
THE ACCOUNTING CYCLE OF A
SERVICE BUSINESS
Subtitle
Books of Accounts – Minimum Requirements

 The type of books the business will maintain depends on many factors such as the size of the
business and financial capacity. However, regardless of the type of book of accounts the
company would maintain, below are the minimum requirement:
 General Journal
 General journal is referred to as the book of original entry. It records business transaction in order of date using
the principle of “debit and credit”.

 General Ledger
 General ledger is referred to as the book of final entry.  It summarized all the journal entries of an account to get
the ending balances.
Books of Accounts – Minimum Requirements

 Cash Receipt Journal

 Cash receipt journal is a special journal used to record cash sales and/or collection of receivables.

 Cash Disbursement Journal

 Cash disbursement journal is a special journal used to record cash payments of expenses and/or payables.

 Sales Journal
 Sales journal is a special journal used to record sales on credit (receivable from customer)

 Purchase Journal
 Purchase journal is a special journal used to record purchases on credit (payable to supplier)
Debits and Credits – The Double Entry System

 Accounting is based on a double-entry system which means that the dual effects of
a business transaction is recorded. A debit side entry must have a corresponding
credit side entry. For every transaction, there must be one or more accounts
debited and one or more accounts credited. Each transaction affects at least two
accounts. The total debits for a transaction must always equal to the total credits.
 An account is debited when an amount is entered on the left side of the account
and credited when a n amount is entered on the right side. The abbreviations for
debit and credit are Dr. (from the Latin debere) and Cr. (from the Latin credere),
respectively.
Debits and Credits – The Double Entry System

 The account type determines how increases or decreases in it are recorded.

Increase in assets are recorded as debits (on the left side of the account) while
decreases in asset are recorded as credits (on the right side). Conversely, increases
in liabilities and owner’s equity are recorded by credits and decreases are entered
as debits.
 The rules of debit and credit for income and expense accounts are based on the
relationship of these accounts to owner’s equity. Income increases owner’s equity
and expenses accounts decreases owner’s equity. Hence, increase in income are
recorded as credit and decreases as debits. Increases in expenses are recorded as
debits and decreases as credits. These are the rules of debit and credit. The
following summarizes the rules:
ACCOUNTING EVENTS AND TRANSACTIONS

 An accounting event is an economic occurrence that causes changes in an

enterprise’s assets, liabilities, and/or equity. Events that may be internal actions,
such as the use of equipment for the production of goods or services. It can be also
an external event, such as the purchase of raw materials from a supplier.
 A transaction is a particular kind of event that involves the transfer of something of
value between two entities. Examples of transactions include acquiring assets from
owner(s), borrowing funds from creditors, and purchasing or selling goods and
services.
TYPES AND EFFECTS OF TRANSACTIONS

 It will be beneficial in the long-term to be able to understand a classification

approach that emphasizes the effects of accounting events rather that the recording
procedures involved. Although business entities engage in numerous transactions,
all transactions can be classified into one of four types, namely:
1. Source of Assets (SA). An asset account increases and a corresponding claims
(liabilities and owner’s equity) account increases. Examples: (1) Purchase of supplies
on account; (2) Sold goods on cash on delivery basis.
2. Exchange of Assets (EA). One asset account increases and another asset
account decreases. Example: acquired equipment for cash.
TYPES AND EFFECTS OF TRANSACTIONS

3. Use of Assets (UA). An asset account decreases and a corresponding claims

(liabilities or equity) account decreases. Example: (1) Settled accounts payable (2)
Paid salaries of employees.
4. Exchange of Claims (EC). One claims (liabilities and owner’s equity) accounts
increases and another claims (liabilities or owner’s equity) account decreases.
Example: Received utilities bill but did not pay.
TYPES AND EFFECTS OF TRANSACTIONS

Every accountable event has a dual but self-balancing effect on the accounting
equations. Recognizing theses events will not in any manner affect the equality of the
basic accounting model. The four types of transactions before may be further
expanded into nine types of effects as follows:
1. Increase in Assets = Increase in Liabilities (SA)
2. Increase in Assets = Increase in Owner’s Equity (SA)
3. Increase in one Asset = Decrease in another Asset (EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
TYPES AND EFFECTS OF TRANSACTIONS

5. Decrease in Assets = Decrease in Liabilities (UA)

6. Increase in Liabilities = Decrease in Owner’s Equity (EC)
7. Increase in Owner’s Equity = Decrease in Liabilities (EC)
8. Increase in one Liability = Decrease in another Liability (EC)
9. Increase in one Owner’s Equity = Decrease in another Owner’s Equity (EC)
Title and Content Layout with Chart
Title and Content Layout with Chart