WEEK 9: THE ACCOUNTING CYCLE

SESSION 25: BUSINESS TRANSACTION

Objective:
At the end of this session, learners should be able to:
1. Identify the steps of the accounting cycle.
2. Define what a transaction is and identify its classification.
3. Identify the effects of transactions on the:
a. Assets and owner's equity as a result of owner's investment/ withdrawal and cash
acquisition of assets. (Starting a business)
b. Assets and owner's equity as a result of owner's income/revenue earned and payment
of expenses.
c. On the assets, liabilities, and the owner's equity as a result of different transactions
affecting the accounting equation.

The Accounting Cycle

The life of a business is divided into accounting periods of equal length. A standard sequence of accounting
procedures is repeated for each period. These uniform procedures done to accomplish the accounting
process are referred to as the accounting cycle.

1. Identifying and analyzing the events to be recorded

This is the process of identifying and analyzing the transactions to be recorded through the business
documents. Business documents are forms containing evidence to support a business transaction. These
documents provide the data concerning the parties involved in the transaction, the exchange made, the
date, and the money value of the exchange. In determining the exchange made, the value received by the
business and the value parted with are translated into their debit and credit components.

2. Recording transactions in the journal

This is known as journalizing. It is the process of recording the transaction in the first book of account
known as the journal.

3. Posting journal entries to the ledger.

This is known as posting. It is the process of transferring the information found in the journal into the book
of final entry known as the ledger. The ledger summarizes the increases or decreases of individual
accounts.

4. Preparing the trial balance

The trial balance is a list of accounts found in the ledger together with the account's balance or total. This
is a proof that for every debit, there is a corresponding credit. Hence, it is also a proof that the ledger is in
balance.

5. Preparing the worksheet and adjusting entries

The worksheet is a common tool used by accountants to assemble on a sheet of paper all the information
needed to prepare the financial statements, adjusting entries, closing entries, and the post-closing trial
balance.

6. Preparing the financial statements

A statement of financial position, income statement, statement of changes in owner's equity, and a
statement of cash flows are prepared to provide useful information to parties interested in the financial
information of the business. ·

7. Journalizing and posting of adjusting journal entries

Adjusting entries are prepared at the end of the accounting period to update the accounts for internal
transactions because they affect more than one accounting period. This will record the accruals, expiration
of deferrals, estimation, and other events from the worksheet.

8. Journalizing and posting of closing journal entries

Closing entries are prepared at the end of the accounting period to update the owner's capital account.
This will also eliminate the balances of the nominal accounts so that they may be ready for the next period.
9. Preparing the post-closing trial balance
After the closing entries have been posted, the post-closing trial balance is prepared from the general
ledger accounts. This is necessary to assure that these entries have been correctly posted. This will also
check the equality of the debits and credits after the closing entries. ·

10. Journalizing and posting of reversing journal entries

Reversing entries are prepared to simplify the accounting process. The adjusting entries are simply
reversed on the first day of the accounting period. Not all adjusting entries are reversed, only accruals and
deferrals that use the nominal accounts.

Steps in the Recording Process

Although it is possible to enter transaction information directly into the accounts without using a journal, few
businesses do so. Practically every business uses three basic steps in the recording process:
1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal. (Session 29)
3. Transfer the journal information to the appropriate accounts in the ledger.

TRANSACTION ANALYSIS (Step 1)

The analysis of transactions should follow these four basic steps:
1. Identify the transaction from source documents.

2. Determine the kind of transaction or exchange made.

 Is it a business transaction or a personal transaction?
3. Analyze the transaction to determine the accounts affected.
 Which element of the accounting equation is affected?
 What particular accounts are affected?
4. Determine the effect of the transaction on the accounts affected.
 What is the effect of the transaction on the element and the account?
5. Apply the rules of debit and credit
 Which side of the account is affected?
 How much is the amount?

SOURCE DOCUMENTS
These are original written evidences that 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:

a. Sales invoices,
b. Cash register tapes,
c. Official receipts,
d. Bank deposit slips,
e. Bank statements,
f. Checks,
g. Purchase orders,
h. Timecards,
i. Statements of account
j. Debit Memo
k. Credit Memo

What are Transactions?

Transactions (business transactions) are a business’s economic events recorded by accountants.

Transactions may be classified into:

a. External transactions involve economic events between the company and some outside enterprise.
For example, Campus Pizza’s purchase of cooking equipment from a supplier, payment of monthly
rent to the landlord, and sale of pizzas to customers are external transactions.
b. Internal transactions are economic events that occur entirely within one company. The use of cooking
and cleaning supplies are internal transactions for Campus Pizza.
Companies carry on many activities that do not represent business transactions.
Examples are:
a. hiring of employees,
b. responding to e-mails,
c. talking with customers, and
d. placing merchandise orders.
Some of these activities may lead to business transactions. Employees will earn wages, and suppliers will
deliver ordered merchandise.

The foregoing illustration demonstrates the transaction identification process

Note: Study these transactions until you are sure you understand them. They are not difficult but
understanding them is important to your success in this subject and in the accounting course in college. The
ability to analyze transactions in terms of the basic accounting equation is essential in accounting

Illustration:
The following items will illustrate the effect of transaction on the accounting equation. The following details
will include amount and the account affected in illustrating the effects on the asset account.

Notice that the accounting equation is always balanced in every transaction such that assets are
always equal to liabilities and capital.

 Use these steps to analyze the effect of a business transaction:

1. Describe the financial event.
a. Identify the property (account title).
b. Identify who owns the property (business owner or others).
c. Determine the amount of increase or decrease.
2. Make sure the equation is balance.

INITIAL TRANSACTIONS
Starting a Business
On initial Investment of Cash and Equipment
1. Oct. 1, 2019, MS. Go obtained the funds to start the business by withdrawing P800,000 from her
personal savings. She deposited the money in a new bank account that she opened in the name of the
MisGo Company.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  - 

What is the effect on the element? Increase (+) - Increase (+)

What account title is affected? Cash Go, Capital

How much is the amount of change? P800,000 = - + P800,000

2. Oct. 1, 2019, Ms. Go invests computer, a copy machine, a printer, calculators and other necessary
equipment at a total value of P100,000 to MisGo Company.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  - 

What is the effect on the element? Increase (+) - Increase (+)

What account title is affected? Equipment Go, Capital

How much is the amount of change? P100,000 = - + P100,000

On purchase of supplies on account/credit:
3. Oct. 3, 2019, MisGo Co. placed an order for printer ink, various sizes of bond papers, photocopier toner,
pens, and papers, and other supplies for P10,000 on credit.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?   -

What is the effect on the element? Increase (+) Increase (+) -

What account title is affected? Supplies Accounts Payable

How much is the amount of change? P10,000 = P10,000 -

On returns of defective items bought:

4. Oct. 4, 2019, MisGo Co. returns P1,200 worth of defective supplies to the seller.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?   -

What is the effect on the element? Decrease (-) Decrease (-) -

What account title is affected? Supplies Accounts Payable

How much is the amount of change? (P1,200) = (P1,200) + -

On payment of credit or account:

5. Oct. 6, 2019, MisGo pays the supplies bought on account for credit.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?   -

What is the effect on the element? Decrease (-) Decrease (-) -

What account title is affected? Cash Accounts Payable

How much is the amount of change? (P8,800) = (P8,800) + -

On purchase of properties:
6. Oct. 12, 2019, MisGo Company purchases P500,000 worth of land paying cash.

Equation Analysis Assets = Assets

What is the affected Element?  

What is the effect on the element? Increase (+) Decrease (-)

What account title is affected? Land Cash

How much is the amount of change? P500,000 = (P500,00)

On withdrawals of an owner:
7. Oct. 15, 2019, Ms. Go withdraws P50,000 from MisGo Co. for personal use.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  - 

What is the effect on the element? Decrease (-) - Decrease (-)

What account title is affected? Cash Go, Drawings

How much is the amount of change? (P50,000) = - + (P50,000)

8. Oct. 18, 2019, Ms. Go withdraws P2,000 worth of supplies for personal use.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  - 

What is the effect on the element? Decrease (-) - Decrease (-)

What account title is affected? Supplies Go, Drawings

How much is the amount of change? (P2,000) = - + (P2,000)

On Revenues and Expenses:

9. October 10, 2019, MisGo Co. renders P25,000 services for cash to its client.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  - 

What is the effect on the element? Increase (+) - Increase (+)

What account title is affected? Cash Service Income

How much is the amount of change? P25,000 = - + P25,000

10. October 20, Renders P9,000 services on credit/account.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  - 

What is the effect on the element? Increase (+) - Increase (+)

What account title is affected? Accounts Receivable Service Income

How much is the amount of change? P9,000 = - + P9,000

11. Oct. 28, 2019, Pays utilities expense for the month P800.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  - 

What is the effect on the element? Decrease (-) - Decrease (-)

What account title is affected? Cash Utilities Expense

How much is the amount of change? (P800) = - + (P800)

On collections of accounts:
12. Oct. 25, 2019, MisGo Co. collects its account in transaction #10 from its client.

Equation Analysis Assets = Assets

What is the affected Element?  

What is the effect on the element? Increase (+) Decrease (-)

What account title is affected? Cash Accounts Receivable

How much is the amount of change? P9,000 = (P9,000)

13. October 16, 2019 MisGo Co. borrows P90,000 cash from a financial creditor issuing a 30-day note.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  

What is the effect on the element? Increase (+) Increase (+)

What account title is affected? Cash Notes Payable

How much is the amount of change? P90,000 = P90,000 +

14. Oct. 31, 2019, MisGo Company pays half the note at end of month.

Equation Analysis Assets = Liabilities + Owner's Equity

What is the affected Element?  

What is the effect on the element? Decrease (-) Decrease (-)

What account title is affected? Cash Notes Payable

How much is the amount of change? (P45,000) = (P45,000) +

Financial Transaction Worksheet

The financial transaction worksheet summarizes the October transactions of Misgo Company to show its
cumulative effect on the basic accounting equation. It also indicates the transaction number and the specific
effects of each transaction.

Note: The Worksheet demonstrates some significant facts:

1. Each transaction is analyzed in terms of its effect on:
a. The three elements of the basic accounting equation.
b. Specific account within each element.
2. The two sides of the equation must always be equal.
 MisGo Company
Financial Transaction Worksheet
Month of October 2019

Assets = Liabilities + Owner's Equity

Accounts Accounts Notes
Cash + Receivable + Equipment + Supplies + Land = Payable + Payable + Go, Capital - Go, Drawings + Revenues − Expenses
1 ₱ 800,000 = ₱ 800,000
2 ₱ 100,000 = 100,000
3 ₱ 10,000 = ₱ 10,000
4 (1,200) = (1,200)
5 (8,800) = (8,800)
6 (500,000) 500,000 =
7 (50,000) = (50,000)
8 (2,000) = (2,000)
9 25,000 = 25,000
10 9,000 = 9,000
11 (800) = (800)
12 9,000 (9,000) =
13 90,000 = 90,000
14 (45,000) = (45,000)
₱ 319,400 0 ₱ 100,000 ₱ 6,800 ₱ 500,000 = 0 ₱ 45,000 + ₱ 900,000 (₱ 52,000) ₱ 34,000 (₱ 800)
₱ 926,200 = ₱ 926,200