Week 8 Date: March 22, 2021

Subject Fundamentals of Accountancy, Business and

Management 1
Type of Activity Concept Notes
Activity Title Steps in Accounting Cycle of a Service Business:
Analyzing and Journalizing Transactions
Learning Target Analyze and record transactions of a service business
in the general journal
Reference Title Fundamentals of Accountancy, Business and
Management 1
Author/s Joy S. Rabo, et. Al
DEFINITION OF ACCOUNTING
CYCLE
The accounting cycle is a series of
recurring accounting steps or processes
that span from the start to the end of a
particular accounting period.
STEPS IN THE ACCOUNTING CYCLE :

5. Journalizing and posting adjusting journal entries

4. Preparing trial balance

3. Posting journal entries to the ledger

2. Journalizing the business transactions

1. Analyzing business transactions from source documents

STEPS IN THE ACCOUNTING CYCLE :

10. Journalizing and posting reversing journal entries

9. Preparing post-closing trial balance

8. Journalizing and posting closing journal entries

7. Preparing financial statements

6. Preparing adjusted trial balance

STEPS IN THE
ACCOUNTING CYCLE OF
A SERVICE BUSINESS
ANALYZING BUSINESS
TRANSACTIONS and
JOURNALIZING
ANALYZING BUSINESS
TRANSACTIONS (Step 1)
STEP 1. Analyzing business transactions from source documents

Transaction analysis involves three simple steps. These are:

1. Classify whether the transaction is a business or a nonbusiness
transaction. If the transaction is nonbusiness, then there is no
need to proceed to step 2.
2. Identify the major account/s and the account title/s affected and
the movements with respect to its/their normal balance/s.
3. Determine the amount/s to be credited or debited.
STEP 1. Analyzing business transactions from source documents

Normal
Increase Decrease
Balance
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Owner’s Equity
• Owner’s Capital
Credit Credit Debit
• Owner’s
Debit Debit Credit
Drawing
STEP 1. Analyzing business transactions from source documents
Normal
Increase Decrease
Balance
Revenues Credit Credit Debit
Expenses Debit Debit Credit
Contra-valuation
accounts:
• Allowance for
Doubtful Credit Credit Debit
Accounts
• Accumulated Credit Credit Debit
Depreciation
 JM Photocopying Center
Chart of Accounts
Assets Owner’s Equity
101 Cash 301 Mercado, Capital
112 Accounts Receivable 302 Mercado, Drawing
Before we proceed with
the first step of the 112b Allowance for Doubtful Accounts 399 Income Summary
accounting cycle, let us 113 Notes Receivable
first establish the 114 Interest Receivable
following chart of 122 Unused Supplies
accounts of the business,
123 Prepaid Rent Revenues
which will be very helpful
in identifying the affected 151 Photocopying Equipment 401 Photocopying Revenues
accounts in our transaction 152 Accumulated Depreciation – 402 Interest Income
analysis: Photocopying Equipment
153 Furniture and Fixtures 499 Other Income
154 Accumulated Depreciation – Furniture
and Fixtures
199 Other Assets
Chart of Accounts continuation …

Liabilities Expenses
201 Accounts Payable 501 Taxes and License Expense
202 Notes Payable 502 Salaries Expense
203 Salaries Payable 503 Supplies Expense
204 Income Tax Payable 504 Utilities Expense
205 Interest Payable 505 Rent Expense
208 Unearned Photocopying Revenues 506 Depreciation Expense
212 Mortgage Payable 507 Doubtful Accounts Expense
215 Loan Payable 512 Interest Expense
299 Other Liabilities 599 Other Expense
STEP 1. Analyzing business transactions from source documents

Example:
TRANSACTION 1:
Mr. Mercado invested cash of Ᵽ30,000 in his business to be
known as JM Photocopying Center.
1. The transaction is a business transaction since it affects the
accounting equation.
2. The major accounts affected are assets and owner’s equity. More
specifically, the account titles affected are Cash (increase through
a debit) and Mercado, Capital (increase through a credit).
3. The amount to be debited is Ᵽ30,000 for Cash and the amount to
be credited is Ᵽ30,000 for Mercado, Capital.
STEP 1. Analyzing business transactions from source documents

Example:
TRANSACTION 2:
Mr. Mercado invested a photocopying machine amounting to Ᵽ30,000
in his business to be known as JM Photocopying Center.

1. The transaction is a business transaction since it affects the accounting

equation.
2. The major accounts affected are assets and owner’s equity. More
specifically, the account titles affected are Photocopying Equipment
(increase through a debit) and Mercado, Capital (increase through a
credit).
3. The amount to be debited is Ᵽ30,000 for Photocopying Equipment and
the amount to be credited is Ᵽ30,000 for Mercado, Capital.
JOURNALIZING (Step 2)
2. Journalizing the business transactions

Journalizing is the process of entering a business transaction in

the form of an accounting entry in the “journal” or the so-
called “book of original entry.”

A journal is where business transactions are initially recorded

in chronological order.
2. Journalizing the business transactions

A journal entry has the following important components:

1. Date of transaction
2. Particulars (account titles and explanation)
3. Folio/Account No. (from chart of accounts)
4. Debit account title/s and debit amount/s
5. Credit account title/s and credit amount/s
2. Journalizing the business transactions

Moreover, a journal entry can take the form of a simple

journal entry or a compound journal entry.
• A simple journal entry is a journal entry that has one
debit account and one credit account.

• A compound journal entry is a journal entry with more

than one debit account or more than one credit account,
or both.
2. Journalizing the business transactions

Examples of simple journal entries follow:

GENERAL JOURNAL

Date Particulars F Debit Credit

(Account Title and Explanation)
2019
July 1 Cash 101 30,000
Mercado, Capital 301 30,000
To record cash investment

1 Photocopying Equipment 151 30,000

Mercado, Capital 301 30,000
To record investment of
photocopying equipment
2. Journalizing the business transactions

An example of a compound journal entry follows:

GENERAL JOURNAL

Date Particulars F Debit Credit

(Account Title and Explanation)
2019
July 1 Cash 101 30,000
Photocopying Equipment 151 30,000
Mercado, Capital 301 60,000
To record investments of cash

and photocopying equipment