Professional Documents
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Chapter 8 Business Transactions and Their Analysis
Chapter 8 Business Transactions and Their Analysis
Management
Chapter 8
Accounting cycle is the financial process starting with recording business transactions
up to the preparation of financial statements. This process demonstrates the purpose of financial
accounting, i.e., to create useful financial information in the form of general-purpose financial
statements. In other words, the sole purpose of recording transactions and keeping track of
expenses and revenues in to turn this data into meaning financial information by presenting it
in the form of a balance sheet, income statement, statement of owner’s equity, and statement
of cash flows.
Specific Objectives
Duration
This is the first step in the accounting cycle. It involves identifying a business transaction
and analyzing whether or not the transaction affects the assets, liability, equity, income or
expenses of the business.
A transaction that has an effect on the accounts is a “accountable event” which needs to
be recorded in the books of accounts. On the other hand, a transaction that has no effect on the
account is a “non-accountable event” which is not recorded in the books of accounts.
Examples of source documents:
1. Sales invoices
2. Official receipts
3. Purchase orders
4. Delivery receipt
5. Bank deposit slips
6. Bank statements
7. Checks
8. Statements of account.
Types of Events
1. External events – are transactions that involve the business and another external party.
Examples include sale, purchase, borrowing of money, and payment of liabilities.
2. Internal events – are events that do not involve and external party. Examples include
production (cooking of barbecue) and casualty losses (e.g., destruction of properties
due to storm earthquake, and the like).
Journalizing
The second step is to record in the journal by means of a journal entry. This recording
process is called journalizing.
The journal is a chronological record of the entity’s transactions. A journal entry shows all the
effects of a business transaction in terms of debits and credits. Each transaction is initially
recorded in a journal rather than directly in the ledger. A journal is called the book of original
entry.
1. Date. The year and month are not rewritten for every entry unless the year or month
changes a new page is needed.
2. Account Titles and Explanation. The account to be debited is entered at the extreme left
of the first line while the account to be credited is entered slightly indented on the next
line. Generally, skip a line after each entry.
3. P.R. (posting reference). This will be used when the entries are posted, that is, until the
amounts are transferred to the related ledger accounts.
4. Debit. The debit amount for each account is entered this column.
5. Credit. The credit amount for each account is entered in this column.
Both the journal entries above are examples of simple journal entries because they
have single debits and credits.
The journal entry above is example of a compound journal entry because it has more
than one debit.
JOURNAL
Date Account titles Debit Credit
2018
Jan. 2 Cash 700
Sales 700
to record total sales of barbecue
JOURNAL
Date Account titles Debit Credit
2018
Jan. 2 Supplies expense 20
Cash 20
to record the supplies expense
Recording drills:
Let us have the following recording drills:
Case #1.1 Initial investment in cash
On January 1, 2019, the owner invests P100,000 cash to the business.
Alternatively, the transaction above can be recorded through simple journal entries as
follows:
JOURNAL
Date Account titles Debit Credit
2019
Jan. 20 Building 1,000,000
Owner's capital 1,000,000
to record the owner's non-
cash investment to the business
JOURNAL
Date Account titles Debit Credit
2019
Feb. 1 Cash 800,000
Notes payable 800,000
to record the loan taken from
a bank
JOURNAL
Date Account titles Debit Credit
2019
Mar.1 Notes payable 400,000
Cash 400,000
to record the partial payment
of notes payable
JOURNAL
Date Account titles Debit Credit
2019
Mar.2 Cash 100,000
Sales 100,000
to record the cash sale
JOURNAL
Date Account titles Debit Credit
2019
JOURNAL
Date Account titles Debit Credit
2019
Mar.8 Cash 80,000
Accounts receivable 80,000
to record the collection of
accounts receivable
JOURNAL
Date Account titles Debit Credit
2019
Mar.20 Advertising expense 5,000
Cash 5,000
to record the cost of advertisement
as expense
JOURNAL
Date Account titles Debit Credit
2019
April. 7 Owner's drawings 10,000
Cash 10,000
to record the owner's drawings
IREVIEW QUESTIONS:
1. What is the accounting cycle? Enumerate the steps in the accounting cycle.
2. When is a business transaction eligible for recording in the books of accounts?
3. How are business transactions identified for recoding purposes? Give examples of
source documents.
4. What are the two types of events? Explain each type briefly.
5. What is a journal entry? Identify the parts of a journal entry.
IV.JOURNAL ENTRIES
The following were the transactions during the first month of operation.
May Transactions
2 Owner’s contributes ₱1,000,000 to the business.
5 Purchase of inventory worth ₱300,000 on cash basis.
6 Purchase of inventory worth ₱400,000 on account.
8 Sale of goods for ₱800,000, on account. The cost of the goods sold is
₱500,000.
11 Payment of ₱400,000 as settlement of accounts payable.
15 Collection of ₱700,000 on accounts receivable.
20 Purchase of equipment worth ₱58,000.
23 Drawings of owner amounting to ₱10,000.
25 Payment of salaries expense of ₱70,000.
28 Payment of interest expense of ₱5,000