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BM1705

ANALYZING BUSINESS TRANSACTIONS
The Account
Accounts are the basic storage units for accounting data used to record the increases and decreases of a
specific asset, liability, or owner’s equity item during a specific period
...
However, account titles can be confusing
...
Moreover, many account
titles change over time as preferences and practices change (Needles, Powers, & Crosson, 2014)
...

Then post (copy) the data to the book of accounts called the ledger
...
, & Oliver, 2012)
...
Most firms use the following asset accounts:
• Cash
...
Cash includes money such as bank
balance, paper currency, coins, and checks
...

• Accounts Receivable
...
Such sales are made on credit (“on account”), and Accounts Receivable is the account that holds
these amounts
...

• Notes Receivable
...
A promissory
note is a written pledge that the customer will pay a fixed amount of money and interest on a certain date
...

• Prepaid Expenses
...
A
prepaid expense is considered an asset because the prepayment provides a future benefit
...
Prepaid rent, prepaid insurance, and office
supplies are separate prepaid expense accounts
...
This account shows the cost of land a business holds for use in operations
...

• Building
...

• Equipment, Furniture, and Fixtures
...
The Furniture account shows the cost of this
asset
...

Liabilities are debts—that is, something you owe
...

• Accounts Payable
...
The promise to pay a debt arising from a
credit purchase is an Accounts Payable
...
An Accounts
Payable is an obligation to pay cash in the near future
...
Opposite with Notes Receivable that is a right to receive, Notes Payable is an obligation to
pay
...
Notes Payable is an obligation to pay cash and interest in the future
...
This is a liability for which the business knows the amount owed, but the bill has not
been paid
...


02 Handout 1

*Property of STI
Page 1 of 13

BM1705

Owner’s Equity is the owner’s claim to the assets of the business
...

• Capital
...
It holds the accumulation
of owner investment, withdrawals, and net income (loss) of the business over the life of the business
...

• Drawing
...
This represents a
return of his or her capital investment, as well as a distribution of earnings from the company
...

Revenues are an increase in equity created by delivering goods or services to customers
...
The
ledger contains as many revenue accounts as needed
...
These have the
opposite effect of revenues
...
These are present or future payments of cash that are
incurred to help the company earn revenues
...
Businesses strive to
minimize their expenses in order to maximize net income
...
A list
of these numbers with the corresponding account titles is called a chart of accounts
...
Typically, it lists accounts in the order in which they appear in the ledger, which is usually
the order in which they appear in the financial statements
...

Account numbers usually have two (2) or more digits
...
The second and third digits in an account
number indicate where the account fits within the category
...
However, each company chooses its own account numbering system
...

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

As a result, every transaction affects at least two (2) accounts
...

T-Account
The T-account is a good place to begin the study of the double-entry system
...
The vertical line
divides the account into three (3) parts (Needles, Powers, & Crosson, 2014):
Title of Account
Debit
(left side)

Credit
(right side)

• a title, which identifies the asset, liability, or owner’s equity account
• the left side, which is called the debit side
• the right side, which is called the credit side

Debits go on the left; credits go on the right
...
They are abbreviated as follows:

Title of Account
DR = Debit

CR = Credit

The terms debit (abbreviated Dr
...
, from the Latin word
“credere”) are simply the accountant’s words for “left” and “right” (not for “increase” or “decrease”)
...
These transactions can be summarized in the Cash account by recording receipts on the left (debit)
side of a T account and payments on the right (credit) side
...

100,000
3,000
103,000
Bal
...

70,000
400
1,200
71,600

When comparing the totals of the two (2) sides, an account shows a debit
balance if the total of the debit amounts exceeds the credits
...
Having
increases on one side and decreases on the other reduces recording errors
and helps in determining the totals of each side of the account as well as the
account balance
...


Expanding the Rules of Debit and Credit
The account category (asset, liability, equity) governs how we record increases and decreases
...
The following
T-accounts provide a summary (Horngren, Harrison Jr
...
Whether an account is increased or decreased by a debit or a credit
depends on the type of account
...
Debits are not always
increases or always decreases – neither are credits
...

Expenses are decreases in equity that result from using up assets or increasing liabilities in the course of
operations
...
Expenses are incurred
...

DEBITS
Accounting
Equation
Rules of
Debit and
Credit

Assets

↑

↓

=
=

CREDITS
Liabilities

↓

↑

+

Owner’s
Equity

↓

↑

+

Revenues

↓

↑

-

Expenses

↑

↓

DR

CR

DR

CR

DR

CR

DR

CR

DR

CR

+

-

-

+

-

+

-

+

+

-

An account’s normal balance appears on the side – either debit or credit – where an increase (+) is recorded in
the account’s balance
...
Liabilities and equity accounts normally have the opposite balance, so they are credit-balance
accounts
...
They have debit balances because they decrease equity
...
, & Oliver, 2012)
...
This is where the accounting data came from
...
If a company is audited,
source documents back up the accounting journals and general ledger as an indisputable audit trail (The Source
Document in an Accounting Transaction, 2018)
...

• Purchase invoice – the source document that tells the business how much and when to pay the vendor
...

• Sales invoice – this is the source document that tells the business how much revenue will be recorded
...
After recording, all source documents should be filed away in some sort of system where they can
be retrieved if and when they are needed
...

Journalizing Transactions
The recording process begins with the transaction
...
The company analyzes this evidence to determine the transaction’s
effects on specific accounts
...

The following are significant in the recording process:
Transaction
The date and a description of the transaction are provided
...
Note that this is not
Double-Entry part of the accounting records but is undertaken before recording a transaction in order to
understand the effects of the transaction
...

Each entry must be in proper journal form
...
The amounts are shown in their respective debit and credit columns
...

Illustration:

Page 1

Journal
Date
Apr 01

Particulars
Debit Account Name
Credit Account Name
Brief explanation

PR

Debit
Amount

Credit
Amount

Peso signs are omitted because it is understood that the amounts are in peso (Php)
...


Types of journal entries:
• Simple Entries – involves only two (2) accounts, one (1) debit and one (1) credit
...
This requires that all debits be listed before the
credits
...

Transaction 1:
Analysis:

On February 01, the owner invested P750,000 cash to start the business, Mac Co
...

Cr
2-1
750,000
Journal Entry
DATE
February 01

Transaction 2:
Analysis:

Transaction 3:
Analysis:

Owner’s Equity
Mac, Capital
Dr
...

750,000

CREDIT
P 750,000

On February 02, Mac Co
...

 Increases the asset account, Equipment P350,000
 Decreases another asset account, Cash P350,000
=

Liabilities

+

Owner’s Equity

Cash
Dr
...

2-2 350,000

PARTICULARS
Equipment
Cash
To record purchase of equipment

DEBIT
P 350,000

CREDIT
P 350,000

On February 03, Mac Co
...
The
company agrees to allow Mac Co
...

 Increases the asset account, Supplies P80,000
 Increases the liability account, Accounts Payable P80,000

Rules of Debit and Credit Application
Assets
=
Supplies
Dr
...

2-3
80,000

02 Handout 1

+

PARTICULARS
Cash
Mac, Capital
To record initial investment of the owner

Rules of Debit and Credit Application
Assets
Equipment
Dr
...

2-2 350,000

Journal Entry
DATE
February 02

Liabilities

Liabilities
Accounts Payable
Dr
...

2-3
80,000

+

Owner’s Equity

*Property of STI
Page 6 of 13

BM1705

Journal Entry
DATE
February 03

PARTICULARS
Supplies
Accounts Payable
To record purchased supplies on account

Transaction 4:

CREDIT
P 80,000

On February 04, Mac Co
...

 Increases the asset account, Cash P60,000
 Increases the equity account, Service Revenue P60,000

Analysis:

Rules of Debit and Credit Application
Assets
Cash
Dr
...

2-4
60,000

Journal Entry
DATE
February 04

DEBIT
P 80,000

=

Liabilities

+

Owner’s Equity
Service Revenue
Dr
...

60,000

CREDIT
P 60,000

On February 05, Mac Co
...

 Increases the liability account, Accounts Payable P12,500
 Decreases the equity account, Advertising Expense P12,500

Analysis:

Rules of Debit and Credit Application
Assets

=

Liabilities
Accounts Payable
Dr
...

2-5
12,500

+

2-5

Owner’s Equity
Advertising Expense
Dr
...

12,500

Journal Entry
DATE
February 05

PARTICULARS
DEBIT
CREDIT
Advertising Expense
P 12,500
Accounts Payable
P 12,500
To record receipt of bill and pay until later date
Transaction 6:
On February 06, Mac Co
...
The
company receives cash of P75,000 from customers, and it bills the balance on account,
P100,000
...

2-6 75,000

Journal Entry
DATE
February 06

02 Handout 1

Cr
...

Cr
...

Cr
...
pays the following expenses in cash: office rent, P30,000;
salaries and wages of employees, P45,000; and utilities, P10,000
...

Cr
...

Cr
...


Transaction 9:
Analysis:

+

Owner’s Equity

DEBIT
P 12,500

CREDIT
P 12,500

On February 20, Mac Co
...

 Increases the asset account, Cash P30,000
 Decreases the asset account, Accounts Receivable P30,000

Rules of Debit and Credit Application
Assets
Cash
Dr
...

2-20 30,000

=

Liabilities

+

Owner’s Equity

Accounts Receivable
Dr
...

2-20 30,000

PARTICULARS
Cash
Accounts Receivable
To record collection of payment from account customers

Transaction 10:
Analysis:

Utilities Expense
Dr
...

2-10 10,000

On February 15, Mac Co
...

 Decreases the asset account, Cash P12,500
 Decreases the liability account, Accounts Payable P12,500

Rules of Debit and Credit Application
Assets
Cash
Dr
...

2-15
12,500

Journal Entry
DATE
February 20

Owner’s Equity
Salaries Expense
Dr
...

2-10 45,000

Rent Expense
Dr
...

2-10 30,000

PARTICULARS
Rent Expense
Salaries Expense
Utilities Expense
Cash
To record payment of various expenses

Transaction 8:
Analysis:

Journal Entry
DATE
February 15

+

DEBIT
P 30,000

CREDIT
P 30,000

On February 27, Mac, the owner of the business, withdraws P65,000 cash for his
personal use
...

2-27

Journal Entry
DATE
February 27

=

Liabilities

+

Cr
...

65,000

DEBIT
P 65,000

Cr
...
01

02

03

04

05

06

10

15

20

02 Handout 1

General Journal
Particulars
Cash
Mac, Capital
To record initial investment of the owner
Equipment
Cash
To record purchase of equipment

PR

Debit
P 750,000

Page 1
Credit
P 750,000

350,000
350,000

Supplies
Accounts Payable
To record purchased supplies on account

80,000

Cash
Service Revenue
To record payment for rendered services

60,000

Advertising Expense
Accounts Payable
To record receipt of bill and pay until later date

12,500

80,000

60,000

12,500

Cash
Accounts Receivable
Service Revenue
To record services rendered to customer

75,000
100,000

Rent Expense
Salaries Expense
Utilities Expense
Cash
To record payment of various expenses

30,000
45,000
10,000

Accounts Payable
Cash
To record payment on billed account

12,500

Cash
Accounts Receivable
To record collection of payment from account
customers

30,000

175,000

85,000

12,500

30,000

*Property of STI
Page 9 of 13

BM1705

27

Mac, Drawing
Cash
To record owner’s withdrawal for personal use

65,000
65,000

Posting to the Ledger
Journalizing a transaction records the data only in the journal – but not in the ledger
...
The process of copying from the journal to the ledger is called posting
...

Illustration:

Page 1

General Journal
Date
2018
Apr 01

Particulars

PR

Cash
Owner’s Capital
Owner’s initial investment

101
301

Debit

Credit

15,000
15,000

General Ledger
Cash
Date
2018
Apr 01

Particulars

PR

Debit

GJ1

Credit

15,000

No
...
301
Balance
15,000

Posting should be performed in chronological order
...
Postings should be made on a timely basis
to ensure that the ledger is up-to-date
...
The particulars space of the ledger account is used infrequently because
an explanation already appears in the journal (Weygandt, Kimmel, & Kieso, 2015)
...
Each account must have a T-account
...

Cash

Service Revenue

Accounts Payable

1-Feb

750,000

2-Feb

350,000

4-Feb

60,000

10-Feb

85,000

6-Feb

75,000

15-Feb

12,500

20-Feb

30,000

27-Feb

65,000

915,000

15-Feb

12,500

3-Feb

80,000

4-Feb

60,000

5-Feb

12,500

6-Feb

175,000

12,500

92,500

235,000

80,000

512,500

Advertising Expense
Mac, Capital

402,500

1-Feb

5-Feb

12,500

750,000

Accounts Receivable
6-Feb

100,000

20-Feb

Rent Expense

30,000
Mac, Drawing

70,000
27-Feb

10-Feb

30,000

65,000

Supplies
3-Feb

Salaries Expense

80,000
10-Feb

45,000

Equipment
2-Feb

Utilities Expense

350,000
10-Feb

10,000

Preparing the Trial Balance
A trial balance is a list of accounts with their balances at a given time
...
They list accounts in the order in which they appear in the ledger
...

The trial balance shows the mathematical parity of debits and credits after posting
...
A trial balance may also uncover errors in journalizing and posting
...
List the account titles and their balances in the appropriate debit or credit column
...
Total the debit and credit columns
...
Prove the equality of the two (2) columns
...
’s ledger
...
The total debits
must equal the total credits
...

Trial Balance
February 28, 2018
Particulars
Cash
Accounts Receivable
Supplies
Equipment
Accounts Payable
Mac, Capital
Mac, Drawing
Service Revenue
Advertising Expense
Rent Expense
Salaries Expense
Utilities Expense

PR

Balance
Debit
Credit
P 402,500
70,000
80,000
350,000
P 80,000
750,000
65,000
235,000
12,500
30,000
45,000
10,000
P 1,065,000

P 1,065,000

A trial balance is a necessary spot check to expose certain types of errors
...

Limitations of a Trial Balance
A trial balance does not guarantee freedom from recording errors
...
For example, the trial balance may balance even when:
a
...

b
...

c
...

d
...

e
...

Even if wrong account or amount is posted, total debits will still equal the total credits
...

Finding Trial Balance Errors
If the debit and credit balances in a trial balance are not equal, look for one (1) or more of the following errors:
• A debit was entered in an account as a credit, or vice versa
...

• An error was made in carrying the account balance to the trial balance
...

Other than simply adding the columns incorrectly, the two (2) most common mistakes in preparing a trial balance
are:
• Recording an account as a credit when it usually carries a debit balance, or vice versa
...

• Transposing two (2) digits when transferring an amount to the trial balance (for example, entering P23,459
as P23,549)
...

So, if a trial balance is out of balance and the addition of the columns is correct, determine the amount by which
the trial balance is out of balance and divide it first by 2 and then by 9
...
If you find such an amount, chances are it’s in the wrong
column
...
If none of these techniques is successful in identifying the error, recompute the balance
of each T account
...
Retrieved from Germanna Community College: https://78bbm3rv7ks4b6i8j3cuklc1wpengine
...
com/wp-content/uploads/2017/06/chart-of-accounts
...
T
...
, W
...
, & Oliver , M
...
Accounting (9th Edition)
...

Needles, B
...
, Powers, M
...
V
...
Principles of accounting
...

The source document in an accounting transaction
...
Retrieved from The Balance:
https://www
...
com/the-source-document-in-an-accounting-transaction-393005
Weygandt, J
...
, Kimmel, P
...
, & Kieso, D
...
(2015)
...
United States of
America: John Wiley & Sons, Inc

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