FUNDAMENTALS OF ACCOUNTANCY, BUSINESS

AND MANAGEMENT 1
TOPIC 10:
BUSINESS TRANSACTIONS PART 1

Objectives:
 Describe the nature and give examples of business transactions
 Identify the different types of business documents.
 Analyze common business transactions using the rules of debit and credit
 Solve simple problems and exercises in the analysis of business transactions.
REVIEW:
5 Major Accounts:
Types of businesses according to activities: 1). Assets

a). Service business 2). Liabilities

b.) Merchandising business 3). Equity

c.) Manufacturing business 4). Revenue/Income

5). Expenses
 SERVICE BUSINESS
A service business provides a needed service for a fee. In general, service businesses actually have no physical product
sold to clients.

Their services are designed to facilitate the work of clients and in return are paid. Service businesses include salons or
barbershops, laundry services, car repairs, medical centers and services of professionals like lawyers and doctors.

The revenue of a service business is usually realized once the service has been substantially completed. Aside from the
minor supplies, the service business does not maintain a high level of inventory as compared to merchandising and
manufacturing businesses.

In relatively small service businesses, all transactions are on cash payments. This means sales are collected
immediately while most expenses are paid outright in the form of cash or checks. The typical financial transactions
recorded for a service company include collecting a deposit from the customer, providing the service and receiving
payment.
ACCOUNTING CYCLE OF SERVICE BUSINESS

Income of the business at the same time.

STEP 2: JOURNALIZING
HOW TO IDENTIFY EVENTS OR TRANSACTIONS THAT NEED TO
BE RECORDED IN THE BOOK OF ACCOUNTS?

Does it affect the composition of either assets, liabilities, equity,

revenues, or expenses?

YES NO
Is there a monetary
amount that can be
YES Record in the books. Do not record.
assigned to the
event?
NO Do not record. Do not record.

Transactions are business economic events that are recorded by accountants. But note that the exact term for
“transactions” is ”business transactions,” so the events have to be related to the business. We should always
ensure that the accounts affected are business’ own accounts not the owner’s personal accounts.
SOURCE DOCUMENTS:
SOURCE DOCUMENTS:
Whenever a transaction is to be recorded, the accountant has to ascertain what accounts of assets, liabilities,
equity, revenue and expenses it affects, and what monetary value is to be assigned to that effect. The various
transaction details we need in order to proceed with the analyzing, identifying and measuring phase, are found in a
document called source documents. Source documents typically indicate the date of the transaction and the
amount. Also from its face, we can usually determine the purpose of the transaction.
Source documents are essentially pieces of evidence. These are critical to the accounting process as they provide
objective based for the dated of transaction, amount and purpose.
Source Document Purpose as a Source Document Where it is generated/by whom
Receipt To evidence the receipt of cash for a sale Outside, the seller firm
Sales invoice (bill) To evidence a purchase, and thus the recording Outside, the seller firm
of a liability to the seller

Bank Statement To evidence the bank charges for the period Outside, the depository bank
which the firm would otherwise not know
about

Time Card To evidence the number of hours worked by Within, workers

employees, to be used as basis for determining
wages.
CHART OF ACCOUNTS: IT IS THE LISTING OF ALL ACCOUNT TITLES USED IN BUSINESS TO
RECORD ALL TRANSACTIONS. IT IS ARRANGED ACCORDING TO THE ORDER OF THEIR APPEARANCE
IN THE FINANCIAL STATEMENTS.
 THE RULES OF DEBIT AND CREDIT
An account is the record of all the movements in a particular item of asset, liability, or equity during the period. The
basic visual representation of an account is the T-account. It resembles the capital letter T: the left side contains all
the debits to the account while the right side contains all credits.
ASSET Liability Equity
Revenue Expenses
Debit side. Credit side debit side credit side debit side credit side debit credit
debit credit
Increases. Decreases decreases increases decreases increase decrease increase
increase. decrease

Contra-Asset Contra-liability Contra-equity

Debit side credit side debit credit debit
credit
Increases decreases decreases increases decrease increases

Increases in contra-assets accounts are recorded as credits. Ex. Accumulated depreciation

Increase in contra-liability accounts are recorded as debits. Ex. Discount on bonds payable
EXAMPLE:
EXAMPLE
SAMPLE JOURNAL ENTRIES IN A CORPORATION
STEP 3: POSTING CONSISTS OF RECORDING THE DATE, AN EXPLANATORY NOTE, THE CROSS
REFERENCE TO THE JOURNAL THE AMOUNT EITHER THE. DEBIT AND CREDIT COLUMN AS
APPROPRIATE AND UPDATED RUNNING BALANCE OF THE ACCOUNT.
POSTING IS AKIN TO SUMMARIZING THE MOVEMENTS (BOTH INCREASES AND DECREASES) IN
EACH OF THE ACCOUNTS FOR THE PERIOD BEING CONSIDERED.
STEP 4: UNADJUSTED TRIAL BALANCE

Trial balance shows the equality of debits and credits and

shows all accounts with their corresponding balances,
segregated into debit and credit columns. All debits balances
are then added up and the same is done to the credit balances.
Trial balance is a diagnostic tool. It acts as first line of defense
against misrecording and mispostings.
REVIEW OF THE ACCOUNTING EQUATION:
ACTIVITY 6