FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1

MODULE
Module No. 6: Week 6: First Quarter
ANALYZING BUSINESS TRANSACTIONS USING THE RULES OF DEBIT
AND CREDIT
Learning Competencies
The learner will be able to:
1. analyze common business transactions using the rules of debit and credit
2. records transactions of a service business in the general journal
3. solve simple problems and exercises in the analyses of business transaction.
Code: ABM_FABM11- IIIg-j-27, ABM_FABM11- IIIg-j-28, ABM_FABM11- IVa-d -30

Let’s Understand
All in all, we have ten (10) steps in the accounting cycle. But in this module, we will
only focus on the first two steps which are the (1) identifying and analyzing business
transactions and (2) journalizing.
1. Identifying and analyzing transactions and events is the first step in the accounting cycle. It
involves identifying business transactions and analyzing whether or not those transactions affect the
assets, liabilities, equity, income and expenses of the business.
Accountable event or the so-called business transaction is a transaction that has an effect on the
accounts which needs to be recorded in the books of accounts.
Non-accountable event or non-business transaction is a transaction that has NO effect on the accounts
and so need NOT be recorded in the book of accounts.
2. Journalizing is the second step in the accounting cycle. Here, the identified accountable
events are recorded in the journals.
Rules of Debits and Credits
The normal balance of an account is on the side where an increase in that account is recorded. To
debit an account with a normal debit balance means to increase that account. To credit it means to
decrease it. On the other hand, to credit an account with a normal credit balance means to increase
that account. To debit means to decrease it. Analyze the table below:
Type of Account Normal Balance Debit Credit
Asset Debit Increase Decrease
Liability Credit Decrease Increase
Capital (Equity) Credit Decrease Increase
Drawing (Contra-Equity) Debit Increase Decrease
Income Credit Decrease Increase
Expense Debit Increase Decrease

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Accumulated depreciation and allowance for bad debts are contra-asset accounts (deducted from an
asset account). For contra-asset accounts, the rule is simply the opposite of the rule for assets.
Friendly Advice: Kindly memorize the normal balances of the accounts and the rules of
debits and credits as this will make your study of accounting much easier.

Illustration: Rules of Debit and Credit

Mr. David Garcia decided to open an electronic repair shop, Garcia Electronic Repair Services. The
following are the transactions for the month of December 2019:

Transaction #1: On December 1, 2019, Mr. Garcia made an initial investment of P900,000 to the
business.
Transaction Analysis:
Accounts Affected Cash (asset) and Owner’s Capital (equity)
Effect on Accounts Cash increased; Owner’s capital increased
Rules of Debits and Increased in asset means Debit; Increased in capital means Credit
Credits
Hence, the initial investment will be recorded as follows:
Date Description PR Debit Credit
2019
Dec. 1 Cash P900 000-
Garcia, Capital P900 000-
To record the owner’s initial investment

Transaction #2: On December 5, Garcia Electronic Repair Services paid registration and licensing
fees for the business, P18,500.
Transaction Analysis:
Accounts Affected Taxes and Licenses Expense (expense) and Cash (asset)
Effect on Accounts Taxes and Licenses Expense increased; cash decreased
Rules of Debits and Increased in expense means Debit; Decreased in asset means Credit
Credits
Hence, the payment of registration and licensing fees will be recorded as follows:
Date Description PR Debit Credit
Dec. 5 Taxes and Licenses Expense P18 500-
Cash P18 500-
To record the payment of registration
and licensing fees

Transaction #3: On December 6, the company acquired tables, chairs, shelves, and other fixtures
for a total of P150,000. The entire amount was paid in cash.

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Transaction Analysis:
Accounts Affected Furniture and Fixtures (asset) and Cash (asset)
Effect on Accounts Furniture and Fixtures increased; Cash decreased
Rules of Debits and Increased in asset means Debit; Decreased in asset means Credit
Credits
Hence, the acquisition and payment of furniture and fixtures will be recorded as follows:
Date Description PR Debit Credit
Dec. 6 Furniture and Fixtures P150 000-
Cash P150 000-
To record the acquisition and payment
of furniture and fixtures
Transaction #4: On December 7, the company acquired service equipment for P800,000. The
company paid a 50% down payment and the balance will be paid after 60 days.
Transaction Analysis:
Accounts Affected Service Equipment (asset), Cash (asset) and Accounts Payable
(liability)
Effect on Accounts Service Equipment increased; Cash decreased; Accounts Payable
increased
Rules of Debits and Increased in asset means Debit; Decreased in asset means Credit;
Credits Increased in liability means Credit
Hence, the acquisition of service equipment with down payment will be recorded as follows:
Date Description PR Debit Credit
Dec. 7 Service Equipment P800 000-
Cash P400 000-
Accounts Payable 400 000-
To record the acquisition of service
equipment with down payment
Transaction #5: Also, on December 7, Gray Electronic Repair Services purchased service
supplies on account amounting to P75,500.
Transaction Analysis:
Accounts Affected Service Supplies (asset), Accounts Payable (liability)
Effect on Accounts Service Equipment increased; Accounts Payable increased
Rules of Debits and Increased in asset means Debit; Increased in liability means Credit
Credits
Hence, the purchased of service supplies on account will be recorded as follows:
Date Description PR Debit Credit
Dec. 7 Service Supplies P75 500-
Accounts Payable P75 500-

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 To record the purchased of service
supplies on account
Transaction #6: On December 9, the company received P95,000 for services rendered.
Transaction Analysis:
Accounts Affected Cash (asset), Service Revenue (income)
Effect on Accounts Cash increased; Service Revenue increased
Rules of Debits and Increased in asset means Debit; Increased in income means Credit
Credits
Hence, the receipt of cash for the services rendered will be recorded as follows:
Date Description PR Debit Credit
Dec. 9 Cash P95 000-
Service Revenue P95 000-
To record the receipt of cash for the
services rendered
Transaction #7: On December 12, the company rendered services on account, P200,000. As per
agreement with the customer, the amount is to be collected after 10 days. Under the accrual basis of
accounting, income is recorded when earned.
Transaction Analysis:
Accounts Affected Accounts Receivable (asset), Service Revenue (income)
Effect on Accounts Accounts Receivable increased; Service Revenue increased
Rules of Debits and Increased in asset means Debit; Increased in income means Credit
Credits
Hence, the service rendered on account will be recorded as follows:
Date Description PR Debit Credit
Dec. 12 Accounts Receivable P200 000-
Service Revenue P200 000-
To record the service rendered on
account
Transaction #8: On December 22, the company collected from the customer in transaction #7.
Transaction Analysis:
Accounts Affected Cash (asset), Accounts Receivable (asset)
Effect on Accounts Cash increased; Accounts Receivable decreased
Rules of Debits and Increased in asset means Debit; Decreased in asset means Credit
Credits
Hence, the collection of accounts receivable for the services rendered will be recorded as
follows:
Date Description PR Debit Credit
Dec. 22 Cash P200 000-
Accounts Receivable P200 000-

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 To record the collection of accounts
receivable
Transaction #9: On December 23, the company paid some of its liability in transaction #5 by
issuing a check. The company paid P25,000 of the P75,500 payable.
Transaction Analysis:
Accounts Affected Accounts Payable (liability), Cash (asset)
Effect on Accounts Accounts Payable decreased; Cash decreased
Rules of Debits and Decreased in liability means Debit; Decreased in asset means
Credits Credit
Hence, the payment of some of the business liability will be recorded as follows:
Date Description PR Debit Credit
Dec. 23 Accounts Payable P25 000-
Cash P25 000-
To record the payment of liability
Transaction #10: On December 25, the owner withdrew cash due to an emergency need. Mr. Garcia
withdrew P100,000 from the company.
Transaction Analysis:
Accounts Affected Drawing (contra-equity), Cash (asset)
Effect on Accounts Drawing increased; Cash decreased
Rules of Debits and Increased in owner’s withdrawal means Debit; Decreased in asset
Credits means Credit
Hence, the withdrawal of cash by the owner from the business will be recorded as follows:
Date Description PR Debit Credit
Dec. 25 Garcia, Drawing P100 000-
Cash P100 000-
To record the owner’s withdrawal of
cash from the business

Let’s Apply
Direction: Write DR if the account should be debited and CR if the account
should be credited.
1. Increased in Office Equipment
2. Increase in Rent Payable
3. Increase in Rent Expense
4. Decrease in Accounts Payable
5. Increased in Service Revenue

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 Let’s Analyze
Directions: Using the business transactions below, determine the accounts affected,
the effect of the transaction on the account, then apply the rules of debit and credit
(put a checkmark aligned with account to be debited or credited) using the format
given.
1. Owner invests cash in the business
2. Pays insurance in advance for six months
3. Pays secretary’s salary
4. Purchases office supplies on account
5. Pays electricity bill
Example: Bills customer for the services rendered
Accounts Affected Effects Debit Credit
Accounts Receivable Increase /
Service fee Increase /

Let’s Try (Evaluation)

Directions: Analyze and record the business transactions below in the general journal. (Every
error and erasure will be deducted from 50 pts.)

May 1 Mr. Cruz, the owner of the business, invested P200,000 cash in the business.
5 He purchased equipment worth P69,000 for business purposes on account.
10 Purchased office supplies on cash, P10,000.
11 Returned some of the defective office supplies purchased amounting to P2,000 and received
a cash refund.
15 Issued check in payment for the equipment previously purchased on account.
15 Paid rental for the month amounting to P15,000
16 The owner withdrew cash amounting to P5,000 from the business for his personal use.
20 Received cash payments of P10,000 from clients for services rendered to them.
25 Rendered services to clients on account, P5,500
30 Collected cash from a customer on account.

Example: June 1 - The owner purchased inventory and paid P20,000 in cash.
Date Description PR Debit Credit
2019
June 1 Inventory P20 000-
Cash P20 000-
To record the purchased of inventory

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