SEMI-FINAL EXAM COVERAGE

BUSINESS TRANSACTIONS AND THEIR ANALYSIS AS APPLIED TO THE

ACCOUNTING CYCLE OF A SERVICE BUSINESS

ACCOUNTING CYCLE: (partial only)

STEP 1 – Identification of events to be recorded
STEP 2 – Transactions are recorded in the journal
STEP 3 – Journal entries are posted to the ledger
STEP 4 – Preparation of a Trial Balance

TRANSACTION ANALYSIS ( STEP 1)

SOURCE DOCUMENTS – Transactions and events are the starting point in the accounting
cycle. By relying on the source documents, transactions and events can be analyzed as to how
they will affect performance and financial position. Source documents identify and describe
transactions entering the accounting process. These original written evidences contain
information about the nature and the amounts of the transactions. These are the bases for the
journal entries; some of the more common source documents are sales invoice, cash register
tapes, official receipts, bank deposit slips, bank statements, checks, purchase orders, time
cards and statement of accounts.

JOURNAL – are referred to as books of original entry or primary entry because it is where
business transactions are first recorded from its source documents. Transactions are recorded
in a systematic manner, in order by date. Journal is derived from the word “jour” which means a
day. Journal therefore means “daily record”.

JOURNAL ENTRY- is a record of any particular transaction in the journal and the process of
recording is called “journalizing”. A journal contains entries wherein the accounts and amounts
being debited and credited are specified together with an explanation for each entry. This
explanation is called “narration”. The general journal is the simplest journal.

FORMAT:

The standard contents of the general journal are as follows:

1. DATE- the year and month are not rewritten for every entry unless unless the year or month
changes or a new page is needed.
2. ACCOUNT TITLE 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.
A brief description of the transaction is usually made on the line below the credits. Generally,
skip a line after each entry.
3. P.R. (Posting references) – 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 in this column.
5. CREDIT – the credit amount for each account is entered in this column
SIMPLE AND COMPOUND ENTRY

In a SIMPLE ENTRY, only two accounts are affected – one account is debited and the other
account credited. However, some transactions require the use of more than two accounts.
COMPOUND ENTRY is when two or more accounts are required in a journal entry.

JOURNALIZING (STEP 2)

EXAMPLE:
TRANSACTION # 1
Assume that on Nov 1, 2017 Galicano Santos invests P 450,000 to open his business, Santos
Landscape Specialist. The journal entry follows:

ANALYSIS : Assets increased. Owner’s equity increased

RULES : Increases in assets are recorded by debits. Increases in owner’s equity are
recorded by credits.
JOURNAL
DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT
1 2016
2 Nov 1 Cash 450,000
Santos Capital 450,000

Initial Investment

TRANSACTION # 2
Rented office space and paid three months’ rent in advance, P21,000. Given the length of time,
more than a month, that this contract is in effect, the matching principle requires that the
contract’s cost initially be recorded as an asset since it provides a future.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 1 Prepaid Rent 21,000
Cash 21,000

Paid rent in advance

TRANSACTION # 3
On Nov 2, Santos purchases a P 300,000 used truck by paying P 200,000 in cash and signing a
P 100,000 note payable which is due in 18 months.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 2 Vehicle 300,000
Cash 200,000
Note Payable 100,000

Vehicle acquired by issuing a note

TRANSACTION # 4
On Nov 3, Santos purchases mechanical lawn mowers for P 54,000 in cash.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 3 Lawn Mowers 54,000
Cash 54,000

Equipment acquired for cash

TRANSACTION # 5
On Nov 4, Santos purchases and use P1,500 worth of gasoline

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 4 Gasoline Expense 1,500
Cash 1,500

Expenses incurred and paid

TRANSACTION # 6
Nov 5, Santos pays P 24,000 for a one year insurance contract that protects his business from
Nov 1 until Oct 31 of the following year.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 5 Prepaid Insurance 24,000
Cash 24,000

Insurance premiums paid

TRANSACTION # 7
Nov 8, Santos purchases P 1,000 worth of office supplies, placing the purchase on his account
with the store rather than paying cash. (Supplies are a prepaid expense ( an asset) until they
are used and thereby become a cost of doing business (an expense).

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 8 Office Supplies 1,000
Accounts payable 1,000

Supplies purchased on account

TRANSACTION # 8
Nov 14, The Santos Landscape Specialist cuts grass for seven customers, receiving P 2,500
from each.
 DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT
1 2016
2 Nov 14 Cash 17,500
Lawn Cutting Revenues 17,500

Revenues earned and cash collected

TRANSACTION # 9
Nov 20, Santos receives P13, 500 from a customer for six future maintenance visits. (an
advance deposit from a customer is an obligation to perform work in the future. It is a LIABILITY
until the work is performed, at which time it becomes revenue. Therefore, the advance deposit is
called unearned revenues.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 20 Cash 13,500
Unearned Revenue 13,500

Unearned Revenues collected

TRANSACTION # 10
Nov 22, Santos Landscape Specialist cuts grass for eight customers, billing each one P 2,500
but receiving no cash. In accordance with the revenue recognition principle, revenue is
recognized upon the completion of a service or a delivery of a product, even if no cash is
received at that time.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 22 Account Receivable 20,000
Lawn Cutting Revenue 20,000

Revenues earned on account

TRANSACTION # 11
Nov 26, Santos pays P 4,000 in salaries to a part-time employee.
DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT
1 2016
2 Nov 26 Salaries Expense 4,000
Cash 4,000

Salaries Paid

TRANSACTION # 12
Nov 28, Santos pays P 1,750 to print advertising fliers.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 26 Advertising Expense 1,750
Cash 1,750

Advertising paid
TRANSACTION # 13
Nov 29, Santos withdraws P 5,000 for personal use.

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 29 Santos Withdrawal 5,000
Cash 5,000

Cash withdrawal by the owner

TRANSACTION # 14
Nov 30, Five of the eight customers billed last Nov 22,each pay P 2,500

DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT

1 2016
2 Nov 29 Cash 12,500
Account Receivable 12,500

Accounts receivable partially collected

THE LEDGER

Ledger – it refers to the grouping of the entity’s accounts.

General Ledger – is the “reference book” of the accounting system and is used to classify and
summarize transactions and to prepare data for basic financial statements.

The accounts in the general ledger are classified into two general groups:

1. Balance Sheet or permanent accounts ( assets, liabilities and owner’s equity)

2. Income Statement or temporary accounts (income and expenses). Temporary or nominal
accounts are used to gather information for a particular accounting period. At the end of the
period, the balances of these accounts are transferred to a permanent owner’s equity account.

CHART OF ACCOUNTS
Chart of Accounts – is a listing of all the accounts and their account numbers in the ledger. The
chart is arranged in the financial statement order, that is, ASSETS first, LIABILITIES, OWNER’s
EQUITY, INCOME and EXPENSES. The accounts should be numbered in a flexible manner to
permit indexing and cross-referencing.

When analyzing transactions, the accountant refers to the chart of accounts to identify the
pertinent accounts to be increased or decreased. If an appropriate account title is not listed in
the chart, an additional account maybe added.
 SANTOS LANDSCAPE SPECIALIST
CHART OF ACCOUNTS
BALANCE SHEET ACCOUNT INCOME STATEMENT ACCOUNTS
ASSETS INCOME
110 Cash 410 Landscaping Revenues
120 Accounts Receivable 420 Lawn Cutting Revenues
130 Office Supplies
140 Prepaid Rent EXPENSES
150 Prepaid Insurance 510 Salaries Expense
160 Vehicles 520 Supplies Expense
165 Accumulated Depreciation - Vehicle 530 Rent Expense
170 Lawn Mower Equipment 540 Insurance Expense
175 Accumulated Depreciation – LM 550 Gasoline Expenses
560 Advertising Expense
LIABILITIES 570 Depreciation Expense - Vehicle
210 Notes Payable 580 Depreciation Expense – LM equipment
220 Accounts Payable 590 Interest Expense
230 Salaries Payable
240 Interest Payable
250 Unearned Revenue

OWNER’s EQUITY
310 Santos Capital
320 Santos Withdrawal
330 Income Summary

POSTING TO THE LEDGER (STEP #)

Posting – it means transferring the amounts from the journal to the appropriate accounts in the
ledger.

LEDGER ACCOUNTS AFTER POSTING

At the end of the accounting period, the debit or credit balance of each account must be
determined to enable us to come up with a trial balance.
 Each account balance is determined by footing (adding) all the debits and credits
 If the sum of an account’s debit is greater than the sum of its credits, that account has a
debit balance.
 If the sum of its credits is greater, that account has a credit balance.

THE JOURNAL
DATE ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT
1 2016
2 Nov 1 Cash 110 450,000
Santos Capital 310 450,000

Initial Investment
THE LEDGER

ACCOUNT: CASH ACCOUNT NO. 110

DATE EXPLANATION P.R. DEBIT CREDIT BALANCE
1 2016
2 Nov 1 110 450,000 450,000

ACCOUNT: SANTOS CAPITAL ACCOUNT NO. 310

DATE EXPLANATION P.R. DEBIT CREDIT BALANCE
1 2016
2 Nov 1 110 450,000 450,000

USE OF T-ACCOUNTS (ANOTHER WAY OF POSTING TO THE LEDGER)

The ledger for an account is typically used in practice instead of a T-account but T-accounts are
often used for demonstration because they are quicker and sometimes easier to understand.
The general ledger is a compilation of the ledgers for each account for a business.
A T-account is a graphic representation of a general ledger account. A "t-account" is made
up of the three most basic parts of an account which are: account title at the top, a debit side
(left), and a credit side (right). It looks like a big letter "T" hence the term "t-account"

CASH
1-Nov 450,000.00 1-Nov 21,000.00
14-Nov 17,500.00 2-Nov 200,000.00
20-Nov 13,500.00 3-Nov 54,000.00
30-Nov 12,500.00 4-Nov 1,500.00
5-Nov 24,000.00
26-Nov 4,000.00
28-Nov 1,750.00
29-Nov 5,000.00
493,500.00 311,250.00
Balance 182,250.00

ACCOUNTS RECEIVABLE
Nov 22 20,000 Nov 30 12,500.00
Balance 7,500

OFFICE SUPPLIES
Nov 8 1,000
Balance 1,000

PREPAID RENT
Nov 1 21,000
Balance 21,000
 PREPAID INSURANCE
Nov 5 24,000
Balance 24,000

VEHICLES
Nov 2 300,000
Balance 300,000

LAWN MOWER EQUIPMENT

Nov 3 54,000
Balance 54,000

NOTES PAYABLE
Nov 2 12,500
Balance 12,500

ACCOUNTS PAYABLE
Nov 8 1,000
Balance 1,000

UNEARNED REVENUE
Nov 20 13,500
Balance 13,500

SANTOS CAPITAL
Nov 1 450,000
Balance 450,000

SANTOS WITHDRAWAL
Nov 29 5,000
Balance 5,000

LAWN CUTTING REVENUES

Nov 14 17,500
Nov 22 20,000
Balance 37,500

SALARIES EXPENSE
Nov 26 4,000
Balance 4,000

GASOLINE EXPENSE
Nov 4 1,500
Balance 1,500
TRIAL BALANCE (STEP 4)
Trial Balance – is a list of all accounts with their respective debit or credit balances. It is
prepared to verify the equality of debits and credits in the ledger at the end of each accounting
period. It is a control device that helps minimize accounting errors. When the equals are total,
the trial balance is in balance.

Procedures in the preparation of a trial balance:

1. List the account titles in numerical order.
2. Obtain the account balance of each account from the ledger and enter the debit balances in
the debit column and the credit balances in the credit columns.
3. Add the debit and credit columns.
4. Compare the totals.

SANTOS LANDSCAPE SPECIALIST

TRIAL BALANCE
NOVEMBER 30, 2016

Cash P 182,250
Accounts Receivable 7,500
Office Supplies 1,000
Prepaid Rent 21,000
Prepaid Insurance 24,000
Vehicles 300,000
Lawn Equipment 54,000
Notes payable P 100,000
Accounts Payable 1,000
Unearned Revenues 13,500
Santos Capital 450,000
Santos Withdrawal 5,000
Lawn Cutting Revenues 37,500
Salaries Expense 4,000
Gasoline Expenses 1,500
Advertising Expense 1,750
P 602,000 P 602,000

LOCATING ERRORS

An inequality in the totals of the debits and credits would automatically signal the presence of an
error. These errors include:

1. Error in posting a transaction to the ledger:

o An erroneous amount was posted to the account
o A debit entry was posted as credit or vice versa
o A debit or credit posting was omitted
2. Error in determining the account balances:
o A balance was incorrectly computed
o A balance was entered in the wrong balance column

3. Error in preparing the trial balance:

o One of the columns of the trial balance was incorrectly added
o The amount of an account balance was incorrectly recorded in the trial balance
o A debit balance was recorded on the trial balance as a credit or vice versa, or a balance
was omitted entirely.

What is the most efficient approach in locating an error or what to do in order to avoid errors?

1. Prove the addition of the trial balance columns by adding these columns in the opposite
direction.
2. If the error does not lie in addition, determine the exact amount by which the trial
balance is out of balance. The amount of the discrepancy is often a clue to the source of
the error.
3. Compare the accounts and amounts in the trial balance with that in the ledger. Be
certain that no account is omitted.
4. Recompute the balance of each ledger account.
5. Trace all posting from the journal to the ledger accounts. As this is done, place a check
mark in the journal and in the ledger after each figure is verified.

Note that even when a trial balance is in balance, the accounting records may still contain
errors. A balanced trial balance simply proves that, as recorded, debits equal credits. The
following errors are not detected by a trial balance.
1. Failure to record or post a transaction.
2. Recording the same transaction more than once.
3. Recording an entry but with the same erroneous debit and credit amounts.
4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.