Fundamentals of Accounting Business and Management

1
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

Business Transaction and Their Analysis as

Applied to the Accounting Cycle of a Service
Business Part I

All business enterprises become a party, directly or indirectly, to various

financial activities or events. These activities and events that occur during a
given period of time, if they affect the business' financial condition and are
capable of being assigned monetary values, are referred to as business
transactions. Events that affect the financial condition of the business, such
as fire, typhoon, theft, accidents, and bankruptcy, are also considered as
business transactions from the point of view of accounting.
This module presented the business transaction and their analysis as applied
to the accounting cycle of a service business. The topic is divided into two
part. In this module we will discuss the first part and the topics include, Rules
of Debits and Credits, Journalizing, Posting, and Preparation of Trial a
Balance.
At the end of this module, the learner shall be able to:
1. Describes the nature and gives examples of business transactions;
2. Identify the different types of business documents;
3. Analyze common business transactions using the rules of debit and
credit; and
4. Solve simple problems and exercises in the analyses of business
transaction.

Business Transaction
The accounting values are affected by the business or economic activities
transpiring daily in a business. A transaction is characterized by: (1) an
exchange of values, (2) between two parties, (3) in terms of money.
There must be an exchange of values. This means that for every value
received by the business there must be an equal parted with. This is dual
effect of a business transaction, which gave rise to the bookkeeping system
called Double Entry Bookkeeping. A transaction either increases or decreases
the assets, liabilities or owner's equity but the equation or equilibrium
among the elements should always be maintained. Another feature of a
business transaction is that there are at least two parties involved. The
transaction must be stated in terms of money. This is contained in SFAS No. 1
Measurements in Terms of Money. It states that the economic resources
(assets) and economic obligations (liabilities) must be recognized and
measured using one common measurement or denominator-money. It
Course Module
should also be noted at this point that non-financial transactions are not
recorded in accounting.
Internal vs External Transactions
Business transactions that involve exchanges of economic consideration with
another separate entity, whether a natural or an artificial entity are referred
to as external business transactions. Examples are: purchased equipment,
rendered services to the customers or clients, took a loan from the bank, paid
bonuses to the employees, used the property of a lessor, the stockholder
received dividend on his investment, the proprietor made an additional
investment in the business.
Internal Transactions are activities or events that occurred within the
business enterprise with no separate entity involved. Some examples of
internal business transactions are the following:
o Used raw materials to produce the finished goods
o Allocated the rent of the building between the administrative and
sales departments
o Transferred the finished goods from the factory floor to the storeroom
o The office burned down
o Discarded the spoiled suppliers
Reciprocal vs. Non-reciprocal Transactions
The concept of equality of value received and value given up is the basic
assumption behind the double-entry bookkeeping system wherein it is
assumed that every transaction has two-ford effects. The assumption is that
there is a complete reciprocity of value received and value parted with in
every business transaction. However, the truth is that there are non-
reciprocal transactions where value is received yet no value is parted with, or
vice-versa. Some examples of non-reciprocal transactions are:
o Donation is received by the business
o Equipment belonging to the enterprise was stolen
o The proprietor made an investment in the business
o the proprietor made a withdrawal for his personal use
o The business awarded a scholarship to an honor student of the
community
In this examples, the enterprise either received something of value but
parted with nothing in exchange, or vice-versa. In order to maintain the
constant equality of the fundamental accounting equation, it is necessary to
assume that every transaction has two-fold effects on the various elements.
Monetary vs. Non-monetary transactions
Under the monetary concept, it is assumed that objective and reliable
monetary values can be assigned to the business transactions. The peso value
assigned to a transaction is frequently the amount of the cash inflow and the
cash outflow. Those activities and events that involved either cash inflows or
cash outflows are called monetary transactions. However, there are
business that do not involve either cash inflows or cash outflows. These
transaction, referred to as non-monetary transactions, are assigned equal-
to-cash values or fair market peso values that are agree upon between the
 Fundamentals of Accounting Business and Management
3
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

parties involved, as evidenced by the business papers called supporting

documents. Some examples of non-monetary transactions are:
o A machine acquired in exchange for a delivery truck.
o A computer was received as payment for the services rendered to a
customer
o A piece of land was acquired by a corporation in exchange for shares
of capital stock.
o Bonds were issued to pay for a newly constructed building
Analyzing the Business Transactions
For every reporting, numerous transactions of a business enterprise are
recorded, classified, and summarized. Each of these transaction would affect
the accounting elements of the enterprise. An accountant should be capable
of identifying the two-fold effects of each transaction. Afterwards, he should
be able to summarize and compress the effects of the numerous transactions
into two-page or three-page financial statements that will be for decision-
making.
Two-fold Effects of the Business Transactions
Under the double-entry bookkeeping system, it is assumed that every
business transaction has two-fold effects an element with a value is received
and an element with a value is given up. It is necessary that an accountant
have the skill to determine which elements are affected by a business
transaction, and the effect or effects of the transaction on said elements. A
business transaction may have any or a combination of the following two-
fold effects on the balance sheet elements.
o Increase in an asset that at the same time increases equity.
o Increase in an asset that at the same time increases a liability
o Decrease in an asset that at the same time decreases equity
o Decrease in an asset that at the same time decreases a liability
o Increase in one form of asset that at the same time decreases another
form of asset
o Increases in one form of liability that at the same time decreases
another form of liability
o Increase in one form of equity that at the same time decreases another
form of equity.
The equity of an owner is affected by the profit (or net income) or loss (or
net loss) of the business enterprise. Since the profit or loss is computed by
deducting the total expenses from total income, then income and expenses
would also affect the equity of the owner. A transaction that involves an
income or an expense will affect the owner's equity in any or a combination
of the following ways:
o Increase in an income (revenue or gain) results in an increase of
equity.
Course Module
 o Decrease in an income (revenue or gain) results in a decrease of
equity.
o Increase in an expense (or loss) results in a decrease of equity.
o Decrease in an expense (or loss) results in an increase of equity.
Likewise, an increase or decrease in an income or an expense element may
affect an asset, a liability, or both elements. The possible effects of income
and expenses on assets and liabilities are summarized as follows:
o Increase in an income (revenue or gain) may result in an increase in
an asset or a decrease in a liability
o Decrease in an income (revenue or gain) may result in a decrease in
an asset or an increase in a liability
o Increase in an expense (or loss) may result in decrease in an asset or
an increase in a liability
o Decrease in an expense (or loss) may result in an increase in an asset
or a decrease in a liability

Rules of Debit and Credit

Accounting is a communication tool that uses certain technologies that have
unique accounting meanings. The word debit, when used as a verb, means "to
enter a value on the left side of an account". However, when used as a noun,
debit means a value entered on the left side of an account". On the other
hand, the word credit, when used as a verb, means 'to enter a value on the
right side of an account". When used as a noun, credit means " a value
entered on the right side of an account". The accountant may use the
abbreviation "Dr." to indicate a debit or debit entry, and "Cr." to indicate a
credit or credit entry.
The effects of a business transaction on the accounting elements, whether
increases or decreases, are expressed by means of debiting or crediting the
affected accounts or account titles. The rules of debit and credit are:
A debit or debit entry is used to indicate:
 An increase in an asset,
 A decrease in a liability,
 A decrease in equity,
 An increase in an expense (or a loss), or
 A decrease in an income (a revenue or a gain)
A credit or credit entry is used to indicate:
 A decrease in an asset,
 An increase in a liability,
 An increase in equity,
 An expense (or a loss), or
 an increase in an increase (a revenue or a gain)
Figure 11.1, summarizes the rules of debit and credit in connection with the
accounting elements. The assumption that for every value received there is a
corresponding equal value given up supports the theory that every debit has
a credit of equal value, or vice-versa. The assumption that every transaction
has equal two-fold effects makes the fundamental accounting equation hold
 Fundamentals of Accounting Business and Management
5
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

true even after recording all the transactions during a given period. This
constant equality of the debits and credits is the backbone of the double-
entry bookkeeping system.
Assets Liabilities Capital account
= +
Debit Credit Debit Credit Debit Credit
Increase Decrease Decrease Increase Decrease Increase

Drawing account
-
Debit Credit
Increase Decrease

Revenues and Gains

+
Debit Credit
Decrease Increase

Expense and Loss

-
Debit Credit
Increase Decrease

Figure 11.1 The Accounting Elements and the Rules of Debit and Credit
Source Documents
All business transactions that are taken up in the accounting records should
be supported by appropriate source documents. It is necessary that the
reported information can be traced back to the supporting evidences.
Therefore, it is important that all source documents are properly prepared,
complied, and controlled.
Usually, original documents are considered better source than duplicates or
copies. Source documents coming from independent outside partied are
considered as neutral and more objective evidences of transactions than
those coming from within the business enterprise. Remember that a
supporting document from within the enterprise is recorded in the books of
accounts only after an authorized officer or officers of the enterprise
approved it for recording.
Before these source documents are recorded in the books of accounts, they
are sorted, arranged and filed, either according to their chronological dates
or their numerical order. If several documents support the same business
activity or event, these are attached and filed together. The source of
documents is properly filed and stored for a reasonable length of time

Course Module
 ranging from 2 to 20 years depending on their nature and importance. The
files should readily and systematically accessible to authorized parties who
would like to undertake verifications and analyses.
Some examples of source or supporting documents are: official receipts,
disbursement vouchers, charge sales invoices, cash sales invoices, delivery
receipts, purchase or letter orders, requisition forms, IOU's, promissory
notes, drafts, statements of accounts, bills, bank passbooks, bank statements,
validated deposit slips, bank withdrawal forms, debit and credit memoranda,
time records, payroll slips, payroll sheets, stock certificated, contracts,
memoranda of agreement, business letters, minutes of meetings, registration
papers, approved journal vouchers, etc.

Two-folds Effect of the Business Transactions on the Account Balances

The two-fold effects of the transactions completed by Happy Tour & Travel
Agency during its first month of operations are individually analyzed in the
following pages. At this point, in order to make the extended illustration
more realistic, values in peso and other important details are added to the
completed transactions of Happy Tour & Travel Agency.
Demonstration problem 1:
March 1: May Marcelo opened a tour and travel service business by
investing cash of P50,000 and two cars worth P750,000.
Analysis: Increase in assets cash P50,000 and cars P750,000
and increase in owner's equity Marcelo, Capital P800,000.
Entry: Debit cash P50,000 cars P750,000 and credit Marcelo,
Capital P800,000.
Cash Marcelo, Capital
March 1 50,000 March 1 800,000

Cars
March 1 750,000

March 3: Borrowed P100,000 from Metrobank for business use.

Analysis: Increase in assets cash and increase in liabilities loans
payable by P100,000.
Entry: Debit cash P100,000 and credit Loans payable P100,000
Cash Loans payable
March 1 50,000 March 3 100,000
3 100,000

March 7: Bought tables and chairs from Blim's. Paid cash of P45,000.
Analysis: Increase in assets furniture and decrease in assets cash by
P45,000.
Entry: Debit furniture & fixtures P45,000 and credit cash P45,000.
 Fundamentals of Accounting Business and Management
7
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

Cash Furniture & fixtures

March 1 50,000 March 7 45,000 March 7 45,000
3 100,000

March 15: Purchased from National Winner electric fan and type writer worth
P55,000, on account.
Analysis: Increase in assets equipment and increase in liabilities
accounts payable by P55,000.
Entry: Debit equipment and increase in liabilities accounts payable.
Equipment Accounts payable
March 10 55,000 March 10 55,000

March 18: Marcelo made a cash withdrawal of P5,000 for personal use.
Analysis: Decrease in assets cash and decrease owner's equity
Marcelo, drawings P5,000.
Entry: Debit Marcelo, drawings P5,000 and credit cash P5,000.
Note that: the entry always mentions the debit side first.
Cash Marcelo, Drawings
March 1 50,000 March 7 45,000 March 18 5,000
3 100,000 18 5,000

March 20: Paid the account due to National Winner.

Analysis: Decrease in assets cash and decrease in liabilities accounts
payable by P55,000.
Entry: Debit Accounts payable P55,000 and credit Cash P55,000.
Cash Accounts payable
March 1 50,000 March 7 45,000 March 20 55,000 March 10 55,000
3 100,000 18 5,000
20 55,000

March 21: P15,000 was received from a tourist for a tour in Baguio.
Analysis: Increase in assets cash and increase in owner's equity
service income by P15,000.
Entry: Debit cash P15,000 and credit service income P15,000.

Cash Service Income

March 1 50,000 March 7 45,000 March 21 15,000
3 100,000 18 5,000
Course Module
 21 15,000 20 55,000

March 22: Paid for Gas and Oil P500 and repairs of car P1,000.
Analysis: Decrease in assets cash P1,500 and decrease in owner's
equity gas and oil expense P500 and repair expense P1,000.
Entry: Debit Gas & oil expense P500, debit repair expense P1,000 and
credit cash P1,500.

Cash Gas & oil expense

March 1 50,000 March 7 45,000 March 22 500
3 100,000 18 5,000
21 15,000 20 55,000
22 1,500
Repair expense
March 22 1,000

March 24: Mr. Gray hired the services of the agency for his visitors and promised
to pay P16,000 on March 31.
Analysis: Increase in assets accounts receivable and increase owner's
equity service income by P16,000.
Entry: Debits accounts receivable P16,000 and credit service income
P16,000.
Accounts receivable Service income
March 24 16,000 March 21 15,00
March 24 16,000

March 25: Paid telephone bill service P500.

Analysis: Decrease in asset cash P500, and decrease in owner's equity
utilities expense by P500.
Entry: Debit utilities expense P500, and credit cash P500
Cash Gas & oil expense
March 1 50,000 March 7 45,000 March 25 500
3 100,000 18 5,000
21 15,000 20 55,000
22 1,500
25 500

March 27: Billed Faculty Club of TSSU P20,000 for a tour in Manila.
Analysis: Increase in assets accounts receivable and increase in
owner's equity service income by P20,000.
Entry: Debit accounts receivable P20,000 and credit service income
P20,000.
 Fundamentals of Accounting Business and Management
9
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

Accounts Receivable Service income

March 24 16,000 March 21 15,000
27 20,000 24 16,000
27 20,000

March 30: Collected P8,000 from customer, Mr. Gray.

Analysis: Increase in assets cash and decrease in assets accounts
receivable by P8,000
Entry: Debit cash P8,000 and credit accounts receivable P8,000
Cash Accounts Receivable
March 1 50,000 March 7 45,000 March 24 16,000 March 30 8,000
3 100,000 18 5,000 27 20,000
21 15,000 20 55,000
30 8,000 22 1,500
25 500

March 31: Paid for office rent P10,000 and salaries of workers P9,000.
Analysis: Decrease in assets cash P19,000 and decrease in owner's
equity rent expense P10,000 and salaries expense P9,000.
Entry: Debit rent expense P10,000, salaries expense P9,000 and credit
cash P19,000.
Cash Rent expense
March 1 50,000 March 7 45,000 March 31 10,000
3 100,000 18 5,000
21 15,000 20 55,000
30 8,000 22 1,500
25 500
31 19,000
Salaries expense
March 31 9,000

Table 11.2 shows the two-fold effect of the transactions of Happy Tour & Travel
Agency. Note that the balance of the accounting equation (Assets=Liabilities +
Owner's Equity) is maintained throughout the illustration in spite of the business
transactions that resulted in increases and decreases in the various accounting
elements.

Course Module
 Date Assets = Liabilities + Owner's equity
Accounts Cars Equipment Furniture Loans Accounts Marcelo Marcelo Income
Cash
receivable payable payable Capital Drawing (expenses)
March 1 50,000 750,000 800,000
3 100,000 100,000
Balances 150,000 750,000 100,000 800,000
7 (45,000) 45,000
Balances 105,000 75,000 45,000 100,000 800,000
15 55,000 55,000
Balances 105,000 750,000 55,000 45,000 100,000 55,000 800,000
18 (5,000) (5,000)
Balances 100,000 750,000 55,000 45,000 100,000 55,000 800,000 (5,000)
20 (55,000) (55,000)
Balances 45,000 750,000 55,000 45,000 100,000 - 800,000 (5,000)
21 15,000 15,000
Balances 60,000 750,000 55,000 45,000 100,000 - 800,00 (5,000) 15,000
22 (1,500) (500)
(1000)
Balances 58,500 750,000 55,000 45,000 100,000 - 800,000 (5,000) 13,500
24 16,000 16,000
Balances 58,500 16,000 750,000 55,000 45,000 100,00 - 800,000 (5,000) 29,500
25 (500) (500)
Balances 58,000 16,000 750,000 55,000 45,000 100,000 - 800,000 (5,000) 29,000
27 20,000 20,000
Balances 58,000 36,000 750,000 55,000 45,000 100,000 - 800,000 (5,000) 49,000
30 8,000 (8,000)
Balances 68,000 28,000 750,000 55,000 45,000 100,000 - 800,000 (5,000) 49,000
31 (19,000) (10,000)
(9,000)
Total 47,000 28,000 750,000 55,000 45,000 100,000 - 800,000 (5,000) 30,000
925,000 925,000

Table 11.2 Summary of Happy Tour & Travel Agency first month Business transaction

Happy Tour & Travel Chart of Account

As we discussed in week 11 module, chart of account is a listing of account titles
which guides the bookkeeper in the recording of the transactions.

Current Assets: 101 to 104

101 Cash
102 Cash receivable
102.1 Allowance for Bad Accounts
103 Notes Receivable
104 Office Supplies
Plant and Equipment: 201 to 203
201 Cars
201.1 Accumulated Depreciation -
Cars
202 Equipment
202.1 Accumulated Depreciation-
 Fundamentals of Accounting Business and Management
11
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

Equipment
203 Furniture &Fixtures
203.1 Accumulated Dep. Furniture
& fixtures
Current Liabilities: 301 to 303
301 Accounts payable
302 Loans payable
303 Utilities payable
Long-term Liabilities: 401 to 402
401 Notes payable
402 Mortgage payable
Equity: 501 to 502
501 Marcelo, Capital
502 Marcelo Drawings
Revenues: 601
601 Service Income
Expenses: 701 to 706
701 Gas & Oil
702 Rent
703 Repair
704 Salaries
705 Supplies
706 Utilities

Journalizing
As we discussed in previous module, journalizing is the process of recording or
entering a business transaction in a journal. Journalizing is done through the
preparation of journal entries.
Happy Tour & travel- Journal entries
The transaction competed by Happy Tour & Travel Agency during its fits month of
its operations, and the manner of journalizing these transactions, are illustrated on
the following. Peso amounts, dates, and other details are added to the original given
data so that complete journal entries could be prepared. Each transaction of Happy
Tour & Travel /agency is journalized separately in a two-column general journal
format.
March 1: May Marcelo opened a tour and travel service business by
investing cash of P50,000 and two cars worth P750,000.

Course Module
 General Journal Page 1
Date
Accounts & Explanation PR Debit Credit
2014
Mar 1 Cash 5 0 0 0 0 -
Cars 7 5 0 0 0 0 -
Marcelo, Capital 8 0 0 0 0 0 -
Original investment

March 3: Borrowed P100,000 from Metrobank for business use.

Analysis: Increase in assets cash and increase in liabilities loans
payable by P100,000.
3 Cash 1 0 0 0 0 0 -
Loans payable 1 0 0 0 0 0 -
Cash loan from Metrobank

March 7: Bought tables and chairs from Blim's. Paid cash of P45,000.
7 Furniture & Fixtures 4 5 0 0 0 -
Cash 4 5 0 0 0 -
Bought from Blim's

March 15: Purchased from National Winner electric fan and type writer worth
P55,000, on account.
15 Equipment 5 5 0 0 0 -
Accounts payable 5 5 0 0 0 -
Bought from National
Winners on account

March 18: Marcelo made a cash withdrawal of P5,000 for personal use.
18 Marcelo, Drawing 5 0 0 0 -
Cash 5 0 0 0 -
Marcelo cash withdrawal
for personal use

March 20: Paid the account due to National Winner.

20 Accounts payable 5 5 0 0 0 -
Cash 5 5 0 0 0 -
Paid account due to
National Winner

March 21: P15,000 was received from a tourist for a tour in Baguio.
 Fundamentals of Accounting Business and Management
13
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

General Journal Page 2

Date Account title/Explanation
PR Dr. Cr.
2014
Mar 21 Cash 1 5 0 0 0 -
Service income 1 5 0 0 0 -
Cash from Baguio tour

March 22: Paid for Gas and Oil P500 and repairs of car P1,000.
22 Gas & Oil expense 5 0 0 -
Repair Expense 1 0 0 0 - 5 0 0 -
Cash 1 0 0 0 -
Paid for expenses

March 24: Mr. Gray hired the services of the agency for his visitors and promised
to pay P16,000 on March 31.
24 Accounts Receivable 1 6 0 0 0 -
Service Income 1 6 0 0 0 -
Billed Mr. Gray for tour

March 25: Paid telephone bill service P500.

25 Utilities expense 5 0 0 -
Cash 5 0 0 -
Telephone bill paid

March 27: Billed Faculty Club of TSU P20,000 for a tour in Manila.
27 Accounts receivable 2 0 0 0 0 -
Service income 2 0 0 0 0 -
Billed Faculty Club of TSU
for Manila tour

March 30: Collected P8,000 from customer, Mr. Gray.

30 Cash 8 0 0 0 -
Accounts receivable 8 0 0 0 -
Course Module
 Collected from Mr. Gray

March 31: Paid for office rent P10,000 and salaries of workers P9,000.
31 Rent expense 1 0 0 0 0 -
Salaries expense 9 0 0 0 -
Cash 1 9 0 0 0 -
Paid for expenses

Posting to the Ledger

As we discussed in previous module, posting is the process of transferring
the data from the journal to the ledger accounts.
Happy Tour & Travel Agency-General Ledger Postings
The general ledger accounts that contain the postings of the transactions of
Happy Tour & Travel Agency, during its first month of operations, as shown
here. These are the postings of the journal entries that came from pages 1
and 2 of the general journal of Happy Tour & Travel, as illustrated earlier.
In actual practice, each account, as a classifying tool, is usually assigned at
least one whole ledger page. However, in this illustration, only the used
portions of the ledger pages are shown in order to save space.

Cash Account No. 101

Date Date
Explanation PR Debit Explanation PR Credit
2014 2014

Mar 1 J1 50 000 Mar 7 J1 45 000 00

105, 000 J1 100 000

Accounts Receivable Account No. 102

Date Date
Explanation PR Debit Explanation PR Credit
2014 2014

Mar 24 J1 16 000 00 Mar 30 J2 8 000 00

27 28,000 J2

Cars Account No. 201

Date Date
Explanation PR Debit Explanation PR Credit
2014 2014
Mar 1 J1 750 000 00

Equipment Account No. 202

Date Date
Explanation PR Debit Explanation PR Credit
2014 2014
Mar 10 J1 55 000 00

Furniture & Fixtures Account No. 203

 Fundamentals of Accounting Business and Management
15
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

Date Date
Explanation PR Explanation Explanation PR Credit
2014 2014
Mar 7 J1 45 000 00

Accounts Payable Account No. 301

Date Date
Explanation PR Debit Explanation PR Credit
2014 2014
Mar 20 J1 55 000 00 Mar 10 J1 55 000 00

Loans Payable Account No. 302

Date Date
Explanation PR Debit Explanation PR Credit
2014 2014
Mar Mar 3 J1 100 000 00

Marcelo, Capital Account No. 501

Date Date
Explanation PR Debit Explanation PR Credit
2014 2014
Mar 1 J1 800 000 00

Marcelo, Drawing Account No. 502

Date PR Debit Date Explanation PR Credit
Explanation
2014 2014
Mar 18 J1 5 000 00

Service Income Account No. 601

Date PR Debit Date Explanation PR Credit
Explanation
2014 2014
Mar 21 J1 15 000 00
24 J1 16 000 00
27 51 000 00 J2 20 000 00
51 000 00

Gas & Oil Expense Account No. 701

Date PR Debit Date Explanation PR Credit

Explanation
2014 2014
Mar 22 J1 50 000 00

Rent Expense
Account No. 702
Date PR Debit Date Explanation PR Credit
Explanation
2014 2014
Mar J2 10 000 00
31

Repair Expense Account No. 703

Date PR Debit Date Explanation PR Credit
Explanation
2014 2014
Mar 22 J1 1 000 00

Salaries Expense Account No. 704

Date Explanation PR Debit Date Explanation PR Credit

Course Module
 2014 2014
Mar 31 J2 9 000 00

Utilities Expense Account No. 705

Date PR Debit Date Explanation PR Credit
Explanation
2014 2014
Mar 25 J1 500 00

Note: Trace each of the entries from the journal to the ledgers to better
appreciate the postings procedure. Postings may be done daily, weekly or
monthly depending on the business needs, kinds of journals and equipment
used.
The alternative format (refer to the Ledger we discuss earlier will look like
this for cash ledger).
Date Explanation PR Debit Credit Balance
Mar 1 Investment J1 50 000 50 000
3 Loan J1 100 000 150 000
7 Furniture J1 45 000 105 000
10 Withdrawal J1 5 000 100 000
20 Account paid J1 55 000 45 000
21 Cash Services J1 15 000 60 000
22 Gas & Oil J1 1 500 58 500
25 Telephone J1 500 58 000
30 Collection J2 8 000 66 000
31 Rent & Salaries J2 19 000 47 000

Preparation of the Trial Balance

Trial Balance is a built-in accounting device that is prepared as of a certain
date, usually at the end of a month, to test the equality of the debit and credit
balances of the ledger accounts after completing the journal entries and
ledger postings. It is a control tool that helps find certain clerical errors
committed in the recording and posting process. Since all the recorded
transactions have equal monetary debit and credit values, it is expected that
the trial balance would balance.
A trial balance, just like the financial statements, has heading and a body. The
heading shows the name of the business enterprise, the name of the form,
which is trial balance, and its date. The body of the trial balance includes a
list of the accounts found in the general ledger, together with their temporary
or unadjusted balances. The account titles, together with their balances, are
copied one after the other as they appear in the general ledger. The balance
of an account is written on the right of each title, with all the debit balances
written under one money column, and all the credit balances written in the
next column. Accounts with zero balances are usually not included in the
preparation of the trial balance. Then, the debit and credit columns of the
trial balance are footed. The total of the debit column and the credit column
of the trial balance should be equal.
Steps in trial balance:
1. Total the debit column and record it is small figures in pencil directly
underneath the last debit amount. This is called pencil footing. It is
 Fundamentals of Accounting Business and Management
17
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

done in pencil and the figure is small to distinguish it from the regular
entry and to permit erasures if the figure is not correct.
2. Total the credit column and record it in small pencil figures directly
under the last credit column amount.
3. Extract the balance: if a debit balance, place it in the explanation
column debit side in line with the last debit posting in small pencil;
and if a credit balance, lace it in the explanation column credit side in
line with the last credit posting.
4. You need not pencil foot if there is a single debit or credit amount
only. Examples are cars, equipment, furniture and fixtures, loans
payable and the expenses. You need not to extract the balance nor
place it in the explanation column if the postings are on one side only
such as the service income.

Happy Tour & Travel Agency - Trial Balance

The following trial balance shows the balances of the accounts taken
from the general ledger of Happy Tour & Travel Agency as of the May 31,
2014. The account codes may or may not be written in the body of the trial
balance.
Happy Tour & Travel
Trial Balance
March 31, 2014
Account No. Account Titles Debit Credit
101 Cash P47 000 00
102 Accounts Receivable 28 000 00
201 Cars 750 000 00
202 Equipment 55 000 00
203 Furniture & Fixtures 45 000 00
302 Loans payable 100 000 00
501 Marcelo, Capital 800 000 00
502 Marcelo, Drawing 5 000 00
601 Service Income 51 000 00
701 Gas & Oil Expenses 500 00
702 Rent Expenses 10 000 00
703 Repair Expense 1 000 00
704 Salaries Expense 9 000 00
705 Utilities Expense 500 00
Totals P951 000 00 P951 000 00

Rules in preparing trial balance:

1. Heading consists of three lines: Name of the business
Title of the report
Course Module
 Date
2. Account titles are arranged in the following order: Assets, Liabilities,
Capital, Income and Expenses.
3. Only accounts with balances appear in the trial balance.
4. The peso sign is placed only in the first debit amount, first amount and
on the totals.
5. The totals are ruled (one horizontal line drawn under the last
amounts of the debit and credit columns) and double ruled (two
horizontal lines are drawn under the total figures).
6. If the total debits do not equal the total credits, then errors must have
been committed. These should be located before ruling and double
ruling the totals. It is therefore advisable that the totals should be in
pencil figures first and if correct then write over in ink.
See to it that the debit totals is equal to the credit totals. If it is not,
then errors like transferring from the journal to the ledger on the
wrong side (cash debit was posted to the cash credit) or wrong
amount (cash debit 40,000 was posted to the debit of the cash ledger
400,000) or wrong footings or wrong balances were copied in trial
balance.

Locating the Errors

If the debit total is not equal to the credit total the difference usually gives a
clue to the error committed:
1. A difference of ten would indicate probably an error in addition. Add
the debit and credit columns of the trial balance again. If the error is
not there, go further and re-add the debit and credit columns of the
ledgers.
2. If the difference is divisible by two, then the error probably is in
posting to the wrong side, like a debit balance in the ledger is copied
on the credit side of the trial balance or a debit entry is the journal
was posted to the credit side of the ledger.
3. If the difference is divisible by 9 or a multiple of 9, the error probably
is in transposition, that is the order of the digits are interchanged,
say an amount of P29,560 was copied as P29,650. Or an error in
trans-placement, that is the decimal point is misplaced, say an
amount of P290,000 was copied as P29,000.

For errors 2 and 3, trace all postings from the journal to the ledger, taking
note that the posting side and the amount are correct.
The trial balance does not provide a complete proof of the accuracy of the
ledgers. It merely checks that the debit is equal to the credit.
Some errors that cannot be detected from the trial balance even if the
debit total is equal to the credit total are the following:
1. Failure to record a transaction.
2. A transaction is journalized but not posted.
3. Some erroneous amount is debited and credited for an entry, for
example a P2,500 rental payment is debited to rent expense and
credited to cash as P2,000.
4. A recorded transaction is posted twice.
 Fundamentals of Accounting Business and Management
19
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

5. An amount is posted to the correct side but the wrong account. For
example, a debit to insurance expense was posted to the debit side
of salary expense.
6. Wrong account title in recording the transaction. For example, a
purchase on account was credited to notes payable instead of to
accounts payable.
Correcting Clerical Errors
The accounting process have certain built-in procedures that allow the
discovery of certain errors. If the trial balance is out-of-balance, this is a
definite sign that error or errors were committed. Errors can be located upon
reviewing the completed journal entries, postings, additions, subtractions,
and other clerical steps performed. Errors are also discovered during the
audit of the financial records. These errors are corrected before the financial
statements are prepared.
Cancelling the wrong words or amounts, and writing the correction
immediately above the mistake is a popular way of handling clerical errors.
When deemed appropriate, the accountant may use an eraser or correcting
journal entries will be addressed in higher accounting subjects.

An accountant must remember that the records he keeps and the reports
that he prepares are also intended to be useful to other data-users. Other
employees and officers of the business may need to look at the files of
documents and books of accounts from time to time. At the end of the year,
the auditor will review the accounting records and the reports prepared by
the accountant. It is, therefore, necessary that the files of the source
documents are in order, and that the accounting records are understandable
to the data-users.
Enumerated are some useful guides that the accountant must follow in
performing his job as record keeper.
1. Generally accepted titles and terminologies should be used in the
records and reports.
2. Abbreviations should be avoided.
3. Money columns in the books and worksheet should be used properly.
4. Values that are added or subtracted should be properly aligned.
5. Peso signs are used, if needed.
6. Addition or subtraction in a money column is indicated by drawing a
single line at the button of the amounts in the column. However, if the
addition or subtraction would give a temporary total , the total is
written in pencil and drawing a single line in not necessary.
7. Neatness in presentation is equally important. The penmanship of the
accountant should legible. Handwriting must not be too big or too
small.
8. The form and layout of financial statements and the other reports
should be properly planned.

Course Module
 9. It is highly recommended that a fountain pen or ballpoint pen with
black ink be used in recording. A pencil may be used for preliminary
or temporary computations and drafts only.
10. Accuracy of the accountant's clerical work is important.
11. Final amounts are highlighted with the use of double lines.
12. The recording should be up-to-date, neat, and complete.
13. The business documents and financial reports should be
systematically and neatly filed.
14. Confidential and important forms, records, and reports should be
closely monitored.
15. If the accountant is using a two-column general journal, a space
should be provided between each journal entry.
16. The accountant should be very alert. He must exercise utmost care
and prudence. he must use his common sense at all times.

Glossary
Bankruptcy is the legal process of liquidating an insolvent debtor's assets,
distributing the proceeds to creditors, and relieving the debtor of any further
liability. Bankruptcy is designed to give the debtor a fresh start
unencumbered by old debts, as well as to fairly settle creditor claims through
an equitable distribution to them of the debtor's remaining assets.
Bank statement usually refers to a statement from the bank showing the
activity in a company's checking account. The statement includes the
deposits received by the bank, checks paid by the bank, banks service charge,
and other amounts transferred into and out of the checking account.
Cash Flow the difference in money flowing in and out. A negative flow
indicates more money going out than coming in. A positive flow shows more
money coming in than going out.
Checks these are negotiable instruments used as a substitute for cash
payments drawn against the company's current account.
Credit memo a document issued to a customer by a seller which reduces the
sellers accounts receivable and its net sales. It is also reduces the buyer's
accounts payable and net purchases.
Credit terms the terms which indicate when payment is due for sales made
on account (or credit). For example, the credit terms might be 2/10, net 30.
This means the amount is due in 30 days; however, if the amount is paid in
10 days a discount of 2% will be permitted. Other terms might be net 10
days, due upon receipt, net 60 days, etc.
IOU is an abbreviation of "I owe you"". It is a sign document acknowledging a
debt.
Invoices it is issued when service or merchandise is given to a customer or
client. It has the name of the business, address and phone number, business
number, invoice number, date, customer's name and address, description of
service or merchandise, amount and signature of the employee.
 Fundamentals of Accounting Business and Management
21
Business Transaction and Their Analysis as Applied to the Accounting Cycle of
a Service Business Part 1

Journal the record of journal entries appearing in order by date. Some refer
to the journal as the book of original entry, since the entries are first
recorded in a journal.
Ledger any book of accounts containing the summaries of debit and credit
entries.
Ledger account a complete record of the transaction recorded in each
individual account.
Official receipt it is issued when cash is received by the business. It gives the
following information: name of the company, phone number, business
number, VAT number, if any, official receipt of cash, form of payment and
signature of the person authorized by the company.
Payroll an account listing employees and any wages and salaries due them.
Promissory note is a written promise to pay a certain sum of money at a
future date. The maker is the debtor and it is addressed to the payee or
creditor.
Statement of account is a bill presented to a customer for service rendered
or merchandise given for which payment is demandable.
Trial balance a comparison of the total of debit and credit balances in the
ledger to check that they are equal.

References
Textbooks:
Kimwell, M.B., (2005), Fundamentals of Accounting. GIC Enterprise & Co.
Inc. 2017 C.M. Recto Avenue, Manila Philippines.
Manuel, Z.V., (2017), "Accounting Process, Basic Concepts and Procedures,
Int’l Edition”. Raintree Trading & Publishing, Inc.
Online Supplementary materials
Misscpa, (2011 December 25). Business transaction.
http://misscpa.com/business-transaction. (last accessed:
4/18/2017).
Unknown, (2011). Business transaction. Accounting Explained.
http://accountingexplained.com/financial/introduction/transaction.
(last accessed: 4/18/2017).
Unknown, (2017). Accounting process. Future Accountant.
http://www.futureaccountant.com/accounting-process/study-
notes/accounting-principles-rules-of-debit-
credit.php#.WPX4P2mGPIU. (last accessed: 4/18/2017).

Course Module