Group 3

Business Transactions and Their Analysis as

Applied to the Accounting Cycle of a Service
Business
 What is Business Transactions?

• A business transaction is an economic event with a

third party that is recorded in an organization’s
accounting system. Such a transaction must be
measurable in money.
 Step 1:Transactions and/or Events
• Identification and measurement of external transaction and Internal
event.At this stage,the documents used by the business are analyze
whether it has financial impact or effect.Recall the rule that only financial
transactions are recorded and that the amount can be measured. These two
conditions must exist in order that a particular transaction is recognized or
recorded. As defined, financial transactions are those activities that change
the value of an asset, liability or an equity.
• 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. The advances from client is a liability because
the business has the obligation to render future service to the client. •
Payment of electric bill is a financial transaction. This will decrease the cash
(asset) and reduce the income of the business at the same time.
 Examples of non-financial transactions:

hiring and termination of employees

recognition from the government as most outstanding business
• death of owner
 The information needed when recording transactions are taken from forms
used to document these transactions.In a typical service business, the
following are the business documents used:

1. Official Receipt or Cash Receipt

• This document is used when a business receives money or a check. An
Official Receipt or Cash Receipt is a document that acknowledges that
money or a check have been received.
2. Charge Invoice or Sales Invoice
• A charge invoice is a document used when a service has been rendered, but the
client will be billed only after a certain number of days from the date of
service. Often, a company will issue a statement of account to a customer,
with the charge or sales invoice attached. For example: in a laundry business,
a customer may avail of the services of the business. However, that customer
and the owner of the business had a prior agreement that all services availed
by the customer will be paid only after 30 days. In this case, a charge invoice
is issued on the day the client availed of the services.
3. Check or Cash Voucher
• The check voucher is a document used when a check is issued to pay a
certain supplier or vendor. For example, in a laundry business, for the
payment of monthly electricity bills, the business may pay either in cash
or check. But the company must prepare a cash or check voucher to
support this payment. This document will serve as a record of payment
and, at the same time, as proof that payment has been made by the
company.
 Step 2 – Preparation of Journal Entries
(journalization)
Through the use of specialized journals (such as those for sales, purchases, cash
receipts, and cash disbursements) and the general journal, transactions and events are
entered into the accounting records. These are called the books of original entry.
Debits and Credits are an integral part of the journalization process. In accounting,
debits or credits are abbreviated as DR and CR respectively,
When to Debit and when to Credit: An increase in an asset account is called a debit or
equity account is called a credit. Likewise, if we decrease an asset account we credit
that account. On the other side of the equation, if we decrease a liability or equity
account we debit those accounts.
•
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
• Recall the discussion on the Chart of Accounts 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
• Recall the discussion on the Chart of Accounts 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
 Journal Entries in a Corporate Set-up
The example above assumed that the business is a sole proprietorship. How
are transactions recorded ifthe owner of the business is a Corporation?
Basically, the same entries are made, except for transactions affecting capital
or equity accounts. To illustrate, let us take the following case:
• Sweeper Corporation was established to provide janitorial services to
clients for a fee. The corporation Issued 5.000 shares of common stock, at
PHP100 par value to shareholders. The issue pricepaid by the
 Step 3 – Posting
The summary (in specialized journals) or individual transactions (in the
general journal) are then postedfrom the journals to the general ledger (and
subsidiary ledgers). Nothing should ever get Recall the lesson on the general
ledger, We will now post the previous transactions of Pedro toposted to the
ledgers without first being entered in a Journal.
• The general ledger. For purposes of discussion, we will be using the three-
column ledger.
 Step 4 – Unadjusted Trial Balance
• At the end of an accounting period (for example, one month or one year)
the working trial balance is prepared. This involves copying each account
name and account balance to a worksheet(working trialbalance). The
resulting first two columns of the worksheet are called the unadjusted trial
balance. In the preparation of the unadjusted trial balance, the balances in
all the general ledgers atthe end ofthe reporting date are forwarded to the
appropriate column. The unadjusted trial balance for thetransactions in our
example from Step 3 is the following:
End