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Learning Activity Sheet No. 5

Topic : BUSINESS TRANSACTIONS AND

THEIR ANALYSIS

Learning Objectives: After reading this Learning Activity Sheet, YOU MUST be
able:
1. To describe the nature, and give examples, of business transactions.
2. To enumerate the steps in the accounting cycle.
3. To identify the different types of business documents.
4. To identify the accounts affected by common business transactions.

THE ACCOUNTING CYCLE

The accounting cycle is a series of steps starting with recording business

transactions and leading up to the preparation of financial statements. This financial
process demonstrates the purpose of financial accounting – to create useful financial
information in the form of general-purpose financial statements.

The entire accounting cycle is divided into three (3) major phases:

Phase 1 – the recording and classifying process

Phase 2 – the summarizing and reporting process
Phase 3 – the closing process

Steps in the Accounting Cycle

The steps comprising each phase of the accounting cycle are as follows:

Phase 1 – Recording and Classifying Process

Step 1 – Compile and arrange the source documents supporting business

transactions.

Step 2 – Analyze the business transactions and determine their two-fold effects
on the accounting elements.

Step 3 – Journalize the business transactions in the books of original entries

called journals.

Step 4 – Post the journal entries to the book of final entries called ledgers.

Step 5 – Prepare the unadjusted trial balance.

Phase 2 – Summarizing and Reporting Process

Step 6 – Gather the data needed to adjust the accounts.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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Step 7 – Journalize and post the adjusting entries.

Step 8 – Prepare the adjusted trial balance (or worksheet preparation).

Step 9 – Prepare the financial statements and supplementary schedules.

Phase 3 – Closing Process

Step 10 – Journalize and post the closing entries.

Step 11 – Rule and balance the ledger accounts.

Step 12 – Prepare the post-closing trial balance.

Step 13 – Journalize and post the reversing entries.

The preparation of trial balances and reversing entries represented in steps (5),
(8), (12), and (13) 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, 2, and 3 are discussed in this Learning Activity Sheet. The other steps
are discussed in the succeeding LASs.

STEP 1: GATHER SOURCE DOCUMENTS

All business transactions are evidenced by or supported by printed forms and

documents. Source documents identify and describe these transactions and events
entering the accounting process.

Source documents come in various forms, which include, but are not limited to,
the following:

a. Sales invoice,
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.

These documents, especially if obtained from outside the organization, provide

objective and reliable evidence about business transactions and events and their
amounts.

Illustrations:

Sales invoice vs. Official Receipt

Sales invoices (SI) are used for the sale of goods, while Official receipts (OR) are
used for the rendering of services.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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Purchase Order

A purchase order (PO) is a document issued by a buyer to a seller indicating the

types, quantities, and agreed prices for products or services the buyer intends to
purchase. Purchase orders are prepared as internal control over purchases.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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For example, to prevent unnecessary purchases, you should require your

personnel to prepare purchase orders for all the purchases of your business.

Delivery Receipt

A delivery receipt is a document signed by the receiver of a shipment

acknowledging the receipt of goods.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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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.

Bank Statement

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

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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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.

Statement of Account

A statement of account is a report a business sends to its customers 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.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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STEP 2: ANALYZING BUSINESS TRANSACTIONS

An accounting system must record all business transactions to ensure complete

and reliable information when the financial statements are prepared.

What is a business transaction? A business transaction is an activity or event

that can be measured in terms of money, and which affects the financial position or
operations of the business entity.

Types of events

1. External events – are transactions that involve one entity and another entity.

2. Internal events – are transactions that involve the entity only.

A business transaction that has an effect on any of the accounting elements –

assets, liabilities, equity, income, and expenses – is an “accountable event,” which
needs to be recorded in the books of accounts. On the other hand, a transaction that
has no effect on the accounting elements is a “non-accountable event,” which is not
recorded in the books of accounts.

To qualify as an accountable/recordable business transaction, the activity or

event must:

1. Be a transaction involving the business entity.

The separate entity concept or accounting entity assumption clearly

establishes a distinction between the transactions of the business and those
of its owner/s.

Case 1: If Mr. Bright, owner of Bright Productions, buys a car for

personal use using his own money, it will not be reflected in the books of the
company. Why? Because it does not have anything to do with business. Now
if the company purchases a delivery truck, then that would be a business
transaction of the company.

Case 2: If Mr. Grim invests ₱20,000 into the company, would that be
recorded in the books of the business? Ask this: Does it have anything to do
with the company? Yes. Then, that would be a recordable business
transaction.

In any case, always remember that a business is treated as an

individual entity, separate and distinct from its owners.

2. Be of a financial character (in a certain amount of money)

Transactions must involve monetary values, meaning a certain amount

of money must be assigned to the elements or accounts affected.

For example, Bright Productions renders video coverage services and

expects to collect ₱10,000 after ten (10) days. In this case, it is explicit. The
income and receivables can be measured reliably at ₱10,000.

Fire, typhoons, and other losses may be estimated and assigned with
monetary values.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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The mere request (order) of a customer is not a recordable business
transaction. There should be an actual sale or performance of service first to
give the company a right over the income or revenue.

3. Have a dual or “two-fold” effect on the accounting elements.

Every transaction has a dual or two-fold effect. For every value received,
there is a value given up / parted with; or for every debit, there is a credit.
This is the concept of double-entry accounting. Debit amounts = Credit
amounts

For example, Bright Productions purchased tables and chairs for

₱6,000. The company received tables and chairs, thereby increasing its
assets. In return, the company paid cash; thus, there was an equal decrease
in assets.

4. Be supported by a source document.

As part of good accounting and internal control practice, business

transactions must be supported by source documents. The source documents
serve as the basis for recording transactions in the journal.

The first step in the accounting process is actually to prepare the source
document and determine the effects of the business transaction on the accounts of the
company. After which, the accountant records the transaction through a journal entry.

Illustrative Example No. 1:

Date Transactions
The business was registered as a single proprietorship with the
Jan. 3
Department of Trade and Industry. Mr. Recentes invested ₱39,000.
4 Bought computer equipment for ₱10,000 cash.

10 Performed legal service for a client and received cash of ₱7,800.

11 Bought office supplies on a cash basis for ₱700.

13 Performed legal service for a client on account of ₱20,000.

14 Purchased office furniture on account from UpTown at a cost of ₱5,000.

15 Collected from January 13 client.

15 Paid UpTown.

18 Salaries paid, ₱1,500.

Borrowed money from RCBC Bank and signed a promissory note for
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₱12,000.
23 Mr. Recentes got cash from the business, ₱2,000.
Paid the following: Advertising, P2,000; Utilities, P500; Rent, P4,250;
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Salaries, P2,500.

Required:

1. Analyze the effect of each transaction on the accounting elements.

2. Use the following account titles:

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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100 ASSETS 300 EQUITY
101 Cash 301 Mr. Recentes, Capital

105 Accounts Receivable 302 Mr. Recentes, Drawings

115 Supplies 400 INCOME

120 Equipment 401 Service Revenue

150 Furniture 500 EXPENSES

200 LIABILITIES 503 Advertising Expense

201 Accounts Payable 510 Rent Expense

202 Notes Payable 530 Salaries

540 Utilities

3. Use the format below in answering this activity:

Date Elements Effects Dr / Cr Account Title Amount

Illustrative Example No. 2:

Date Transactions

Feb. 3 Received cash of ₱200,000 from the owner, who invested in the business.

5 Paid ₱3,000 cash to purchase office supplies.

8 Performed legal service for a client and received cash of ₱7,800.

13 Paid monthly office rent of ₱5,000.

14 Performed legal service for a client on account of ₱20,000.

15 Purchased office furniture on account at a cost of ₱5,000.

17 Received cash on account, ₱9,000.

20 Paid cash on account, ₱2,500.

23 Sold land for ₱120,000, which was our cost of the land.

26 The owner withdrew cash for his personal use, ₱2,000.

Required:

1. Analyze the effect of each transaction on the accounting elements.

2. Use the format below in answering this activity:

Date Elements Effects Dr / Cr Account Title Amount

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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STEP 3: JOURNALIZE THE BUSINESS TRANSACTIONS

After an accountable event is identified and analyzed, the next step is to record it
chronologically in the journal through journal entries. Each journal entry is expressed
in terms of equal (in total) debits and credits to the accounts affected. This recording
process is called journalizing.

Journal Entry

A journal entry has the following format:

GENERAL JOURNAL PAGE 1

P
DATE DESCRIPTION DEBIT CREDIT
R

MM DD
1 Account title to be debited
Account title to be
2 credited

3 Short explanation

Journalizing Process

Companies make separate journal entries for each transaction. A complete entry
consists of the following:

1. The year is entered in small figures at the top of the column immediately after
the column heading “Date.” The year is repeated only at the top of each new
page. The month is entered for the first entry on the page and for the first
transaction of the month. The day of the month is recorded for every
transaction, even if it is the same as the prior entry.

2. The account title to be debited is written first, and the peso amount to be
debited appears in the left-hand money column, labeled as debit.

3. The account title to be credited appears below the account debited and is
indented to the right. The peso amount credited appears on the right-hand
money column, labeled as credit.

4. A brief description of each transaction appears immediately below each

journal entry. If an entry affects more than two accounts, the entry is called
a compound entry. A space is left between journal entries. The blank space
separates individual journal entries and makes the entire journal easier to
read.

5. The corresponding account number for a specific account title is entered in

the Posting Reference (PR) or Folio column during journalizing.

Simple and Compound Journal Entries

A journal entry may have one of the following formats:

1. 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.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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2. Compound journal entry – one that contains two or more debits or credits.

Illustrative Example No. 3:

The following are the transactions of Resilient Company for March 2022:

Mr. WorkHard invested ₱260,000 cash in an accounting firm under the

Mar. 1
registered name of Resilient Company.
3 Paid rent for the month, ₱13,400.

4 Bought office equipment for cash, ₱25,750.

5 Bought furniture from Untrustworthy Shop, on account, ₱18,500.

6 Bought office supplies from Trustworthy Shop, on account, ₱8,500.

7 Services rendered and received cash from clients, ₱110,750.

9 Mr. WorkHard invested additional cash of ₱20,000.

11 Paid the account on Trustworthy Shop in full amount.

13 Services rendered to Mr. Courage, on account, ₱10,500.

15 Paid the salary of his assistant for the first half of March, ₱3,800.
Mr. WorkHard withdrew ₱24,000 cash from the business for his personal
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use.
20 Paid the light and water bills, ₱3,450.
23 Collected cash from the account of Mr. Courage in full amount.

25 Bought additional office supplies paid in cash, ₱2,750.

31 Paid the salary of his assistant for the second half of March, ₱3,800.

Required:

1. Journalize the above transactions.

2. Use the following account titles and numbers:

Resilient Company
Chart of Accounts

Cash 101 Accounts Payable 201

Accounts Receivable 111
Office Supplies 121 Mr. WorkHard, Capital 301
Office Equipment 131 Mr. WorkHard, Drawing 311
Furniture and Fixtures 141
Service Revenue 401

Rent Expense 501

Salaries Expense 511
Light and Water Expense 521

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023

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Review Questions No. 5

Instructions: After reading the lecture above, answer the following review questions.
Write your answers in your notebook.

1. Enumerate the three (3) major phases of the accounting cycle.

2. Enumerate the steps in the accounting cycle.
3. Give at least five (5) source documents aside from the given examples in this LAS.
4. What are business transactions?
5. What is journalizing?

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: August, 2023