CHAPTER 10

BUSINESS TRANSACTIONS
AND THEIR ANALYSIS AS
APPLIED TO THE
ACCOUNTING CYCLE OF A
SERVICE FIRM (PART 1)
 CONTENT
 Chapter Outline
 Learning Outcomes
 Learning Objectives
 Proper Lesson:
Accounting process
Identification of an event (1st step)
Analysis of the effect of that event
Recording to the journals (2nd step)
Posting to ledger (3rd step)
Preparing a trial balance (4thstep)
 Exercises : Service Company Problems
 CHAPTER OUTLINE
Source Documents
Double-entry system of bookkeeping.
Books of accounts
Journal
Ledger
Recording and posting process
Chart of accounts
A complete accounting process of a service concern.
 LEARNING OUTCOMES
At the end of this chapter, the students should be able to:
 Describe the nature of business transactions;
 Identify the different type of documents;
 Analyze common business transactions using the rules of debit and credit;
 Solve simple problem and exercises in the analysis of business
transactions;
 Know how to use journal and ledger books; and
 Know how to prepare trial balance.
 LEARNING OBJECTIVES
At the end of the day, the students should be able to:

 Understand that by knowing the source documents as the first sequential

step next to journalizing process, we would able to determine the value
received and parted with, leading to the journalizing process.
 Know what are the books of accounts, the use of General Journal and
General Ledger.
 Find out that the chart of accounts are the same with the accounts that are
found in General Ledger.
 Increase our learning through the illustrative problems.
 ACCOUNTING PROCESS
The core of accounting is the accounting process. It outlines the
various procedures accountants carry out that lead to the preparation of
financial statements which will be used by both external and internal
users to make economic decisions.
 ACCOUNTING PROCESS
The process begins with the identification of an event, the analysis
of the effects of that event and the measurement of the impact of that
event to the business’ financial statement.
 IDENTIFICATION OF AN EVENT
(1st Step)

The basis of identifying transactions are the supporting business

documents that are on file or yet to be filed as evidence of transactions
to ensure the reliability and verifiability of accounting records.
 ANALYSIS OF THE EFFECT OF THAT
EVENT
Questions to be considered in analyzing events.
 Which of these events do you think needs to be recorded?
 How do you know if an event is to be recorded in the books or not?
 Does it affect the composition of the either assets, liabilities, equity,
revenue or expenses?
 Is there a monetary amount that can be assigned to the event?
Tips of analyzing an events:

1. See to it that there is an increase or decrease in assets, liabilities, equity,

expenses or income.
2. Notice if there is an effect of the accounting equation.
3. Record only those accounts that affect the accounting equation.
Sample business transactions:

1. Firm buys a printer for the office for P5,500.

2. Firm hires two employees which will be paid P15,000 monthly.

3. Firms pays rent on the land where its building stands – P12,300.

4. Firm signs a subscription contact for an internet plan at P999 per month which
will be due at the end of each month.

5. Firm orders 20 packs of brown envelopes from the bookstore at P20 per pack.
 RECORDING TO THE JOURNALS
(2nd Step)
After analyzing transactions, these are recorded to the appropriate journals in a
process aptly named journalizing. The journal entry will require a date, account
titles, explanatory note to be express in words and amounts. A final step is made
when journal entries are posted to the ledgers, that is, filling the reference column
with the ledger cross-reference.
 Rules of Debit and Credit
1. Increases in assets are recorded as debits; decreases in assets as
credits.

2. Increases in liabilities are recorded as credit; decreases in liabilities

as debits.

3. Increases in equity are recorded as credits; decreases in equity as

debits.
 Rules of Debit and Credit
1. Increases in contra-assets are recorded as credits.
Example: Accumulated depreciation.

2. Increases in contra-liabilities are recorded as debit.

Example: Discount on Bonds Payable.

3. Increases in contra-equity are recorded as debits.

Example: Treasury Stocks.
 POSTING TO LEDGER
(3rd Step)

Posting to the ledger is akin to summarizing the movement (both

increase and decrease) in each of the accounts, for the period being
considered. Posting consist of recording the date, explanatory note, the
cross-reference to the journal, the amount in either the debit or credit
column appropriate and updated running balance of the account.
 JOURNAL
Page #

Date Account Titles and Explanation Reference # Debit Credit

Feb 14 Cash 101 P200,000
Loretz, Capital 301 P200,000
Owner’s investment of cash in the business

LEDGER

CASH Reference #

Date Explanation Ref Debit Credit Balance

Jan 1 Investment of Cash by Owner J1 500,000 500,000
Jan 5 Purchased of inventories J1 100,000 400,000
Jan 10 Collection of customer’s accounts receivable J1 150,000 550,000
Jan 15 Paid Salaries to employees for the month J1 30,000 520,000
Jan 31 Balance 520,000
Sample Problem: Service Concern

 On December 1, 2019, Mr. Donald Gray started Gray Electronic Repair Services
by investing P10,000.

  December 5, Gray Electronic Repair Services paid licensing fees for the business,
P370.

  December 6, the company acquired tables, chairs, shelves, and other fixtures for a
total of P3,000. The entire amount was paid in cash.

 December 7, the company acquired service equipment for P16,000. The company
paid a 50% down payment and the balance will be paid after 60 days
 December 8, Gray Electronic Repair Services purchased service supplies on
account amounting to P1,500.

 December 9, the company received P1,900 for services rendered.

 December 12, the company rendered services on account, 4,250.00. 

 December 14, Mr. Gray invested an additional P3,200.00 into the business.

 Renderedservices to a big corporation on December 15. As per agreement, the

P3,400 amount due will be collected after 30 days.
 December 22, the company collected from the customer in Dec. 12.

 December 23, the company paid some of its liability in Dec. 8 by issuing a check.
The company paid P500 of the P1,500 payable.

  December 30, the company acquired a P12,000 short-term bank loan; the entire
amount plus a 10% interest is payable after 1 year.

  December 31, the company paid salaries to its employees, P3,500.

Required: Journal Entry , Ledger and Trial Balance.

End of discussion.
 Review:

 1st Step Identifying Transactions

 2nd Step Journalizing
 3rd Step Posting to Ledger
4th Step Preparing Trial Balance.
 LEARNING OBJECTIVES
At the end of the day, the students should be able to:

 when is the Trial Balance prepared?

 The purpose of a Trial Balance.

 Acquaint the proper use and format of a Trial Balance.

 Locating errors in the Trial Balance.

 PREPARING A TRIAL BALANCE
(4thStep)

To prove that we have maintained the debits and the credits from
total perspective, we use a trial balance. This shows all the accounts
with their corresponding balances, segregated into debit and credit
column. All debit balances are then added up, and the same is done to
the credit balances.
 TRIAL BALANCE
Is a diagnostic tool. It acts as the first line of defense against
misrecordings (in the journal) and misposting (in the ledger). Because
trial balance is supposed to prove the equality of the debit and the
credit. If an accountant found out that the trial balance does not show
equal debit and credit should not proceed further into the accounting
process until the error is corrected.
 TRIAL BALANCE
The following errors, when committed, will escape the guard of the trial balance.

1. Transaction is posted twice.

2. Transactions was posted to the wrong accounts.
3. The transactions is not journalized.

4. The transactions is not posted.

5. Errors offset each other.
EXERCISES
 Kuya Joem decided to open an ice cream store on January 1, 2019. In order to do so, he invested
P300, 000 for the establishment of his business. On the month of January, Kuya Joem also incurred the
following transactions:

January 5 Bought the necessary equipment for the ice cream shop. The purchase price was P200, 000
cash.
January 7 Bought inventories on credit. The goods were bought from Ryan Store at a cost of P50, 000.
The goods are to be paid in 15 days.
January 15 The ice cream store opened. During this day, Joem sold P40, 000 ice cream. Half of this was
paid in cash and the other was to be paid in 15 days. The cost of the ice cream sold is P20,
000.

January 22 Paid Ryan Store.

January 30 Received payment for the goods sold in January 15.
 
 
JOURNAL ENTRIES
Jan 1, 2019 CASH P300,000
JOEM,CAPITAL P300,000
Jan 5, 2019 EQUIPMENT P200,000
CASH P200,000
Jan 7, 2019 INVENTORIES P50,000
A/P P50,000
Jan 15, 2019 CASH P20,000
ACCOUNTS RECEIVABLE P20,000
SALES P40,000
Jan 22, 2019 ACCOUNTS PAYABLE P50,000
CASH P50,000
Jan 30, 2019 CASH P20,000
A/R P20,000
 JOEM ICE CREAM SHOP
UNADJUSTED TRIAL BALANCE
January 31, 2019

ACCOUNT TITLE DEBIT CREDIT

CASH 90,000
EQUIPMENT 200,000
INVENTORIES 50,000
JOEM, CAPITAL 300,000
SALES 40,000
340,000 340,000
On April 01, 2019 Chosen started business with P100,000 and other transactions
for the month are:
 
April 02 Purchased Furniture for cash P7,000.
 
April 08 Purchased inventories for cash P2,000 and for credit P1,000 from
Vincent Retail Store.
 
April 14 Sold Goods on account to Khan Brothers P12,000 and cash sales P5,000.
 
April 18 Owner withdrew of worth P2,000 for personal use.
 
April 22 Paid Vincent Retail Store P500.
 
April 26 Received P10,000 from Khan Brothers.
April 30 Paid salaries, P2,000.
Journal Entries:

4/1/20 CASH 100,000

CHOSEN, CAPITAL 100,000

4/2/20 FURNITURE & FIXTURE 7,000

CASH 7,000

4/8/20 INVENTORIES 3,000

CASH 2,000
ACCOUNTS PAYABLE 1,000

4/14/20 CASH 5,000

ACCOUNTS RECEIVABLE 12,000
SALES 17,000

4/18/20 CHOSEN, DRAWING 2,000

CASH 2,000

4/22/20 ACCOUNTS PAYABLE 5,000

CASH 5,000

4/26/20 CASH 500

ACCOUNTS RECEIVABLE 500

4/30/20 SALARIES EXPENSE 2,000

CASH 2,000.00
 CHOSEN BUSINESS
UNADJUSTED TRIAL BALANCE
April 30, 2020

ACCOUNT TITLE DEBIT CREDIT

CASH 101,500
INVENTORIES 3,000
FURNITURE AND FIXTURE 7,000
ACCOUNTS RECEIVABLE 2,000
ACCOUNTS PAYABLE 500
CHOSEN, CAPITAL 100,000
CHOSEN, DRAWING 2,000
SALES 17,000
SALARIES EXPENSE 2,000
TOTAL 117,500 117,500
 Overview of next topic
BUSINESS TRANSACTIONS AND THEIR ANALYSIS
AS APPLIED TO THE ACCOUNTING CYCLE OF A
SERVICE FIRM (PART 2)

 Classifications of Adjusting Entry (Depreciation, Bad Debts, Prepaid expense,

Accrued Expense, Unearned Revenue and Accrued Revenue) .
 Characteristics of Adjusting Entry
 Preparing Adjusting and Closing Entry
Assignment - Give the definition of the ff:
(½ crosswise)
 Depreciation
 Bad debts
 Prepaid Expenses
 Accrued Expenses
 Unearned Revenue
 Accrued Revenue