Chapter 4

Recording of
Business
Transactions
Acounting Cycle - refers to series of sequential steps or
procedures performed to accomplish accounting process
• 1. Identification of Events to be recorded
• 2. Transactions are recorded in the Journal
• 3. Journal Entries are Posted in the Ledger
• 4. Preparation of Trial Balance
• 5. Preparation of a Worksheet Including Adjusting Entries
• 6. Preparation of the Financial Statements
• 7. Adjusting Journal Entries are Journalized and Posted
• 8. Closing Journal Entries are Journalized and Posted
• 9. Preparation of Post Closing Trial Balance
• 10. Reversing Journal Entries are Journalized and Posted
Note:
• The cycle is repeated each accounting period.

• The first 3 steps are accomplished during the period,

while the 4th to 9th generally occur at the end of the
period. The last step is optional and occurs at the
beginning of the next accounting period.
Transaction Analysis (Step 1)

4 Basic Steps:
• identify the transactions from source documents
• indicate the accounts - either assets, liabilities, equity,
income or expenses - affected by the transaction
• ascertain whether each account is increased or
decreased by the transaction
• using the rules of debit and credit, determine whether to
debit or credit the account to record its increase or
decrease.
Source Documents
• identify and describe transactions and events entering
the accounting process.

• these original written evidences contain information

about the nature and the amounts of the transactions.

• ex: sales invoice, cash register tapes, official receipts,

bank deposit slips, bank statements, checks, etc.
Transactions are Journalized (step 2)
• Journalizing is the process of recording a transaction.

• The Journal is a chronological record of the entity's

transactions. A journal entry shows all the effects of a
business transaction in terms of debits and credits. A
journal is called the book of original entry. The general
journal is the simplest journal.
Format
• Standard contents of a general journal are as follows:
• 1. Date. The year and month are not rewritten for every
entry unles the year or month changes or a new page is
needed.
• 2. Account titles and Explanation/Decription. 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 credit.
Generally skip a line after each entry.
• Standard contents cont.
• 3. P.R. (posting reference). 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 cloumn.
• Assume that on Nov 1, 2019 - Mr Ton Te, owner of Te Welding
Shop invests P450,000 in the bank to start the business.

• Journal
Date Account Titles and Explanation P. R. Debit Credit

2019

Nov. 1 Cash (assets) P 450,000

Te, Capital (owner's equity) P 450,000

Initial investment.
Simple Entry
• only two accounts are affected; one for the debit and one
for credit.

Compound Entry
• three or more accounts are required in one journal entry.
Rules of double-entry system are observed in
each transaction:

• Two or more accounts are affected by each transaction.

• The sum of the debits for every transaction equals the sum of the
credits.

• The equality of the accounting equation is always maintained.

• Nov 1 - Mr Ton Te, owner of Te Welding Shop invests P450,000 to start
the business.
• Accounts affected: Assets Amd Owner's Equity
• Analysis Assets increased. Owner's Equity increased
• Rules increase in assets are recorded by debits; increase in owner's equity
are recorded by credits
• Entry: increase in assets is recorded as debit to Cash. Increase in owner's
equity is recorded by a credit to Te, Capital.
Date Account Title and Description P.R. Debit Credit
2019
Nov. 1 Cash (A) 450,000
Te, Capital (O E) 450,000

To record initial capital.

• Nov 1 Rented office space and paid 3 mos rental in advance, P21,000.
• Accounts Affected: Assets
• Analysis: Assets are increased. Assets decreased.
• Rules: Increase in assets are recorded by debits. Decrease in assets are
recorded by credit.
• Entry: Increase in assets is recorded by a debit to Prepaid rent. Decreased
is recorded by a credit to Cash

Date Account Title and Description P.R. Debit Credit

2019
Nov. 1 Prepaid Rent (A) 21,000

Cash (A) 21,000

To record advance payment for
rent.
• Nov. 2 Te purchased a P300,000 Vehicle paying P200,000 cash and
signing a note payable in 18 mos.
• Accounts affected: Asset and Liability
• Analysis: Assets are increased. Assets decreased. Liabilities increased.
• Rules: Increase in assets are recorded by debits. Decrease in assets are
recorded by credits. Increase in Liabilities are recorded by credits.
• Entry: Increase in assets is recorded by a debit to Vehicle. Decreased is
recorded by a credit to Cash. Decrease in Liabilties is reorded by a credit to
Notes Payable
Date Account Title and Description P.R. Debit Credit

Nov. 2 Vehicle (A) 300,000

Cash (A) 200,000
Notes Payable (L) 100,000
To record purchase of a
vehicle.
Nov 3 Purchased a mechanical welding equipment for P54,000 .
Accounts affected: Assets
• Analysis: Assets are increased. Assets decreased.
• Rules: Increase in assets are recorded by debits. Decrease in assets are
recorded by credits.
• Entry: Increase in assets is recorded by a debit to Equipment. Decrease
assets is recorded by a credit to Cash
Date Account Title and Description P.R. Debit Credit

2019
Nov. 1 Equipment (A) 54,000

Cash (A) 54,000

To record purchase of
equipment.
Nov 4 Purchased P1,5000 worth of gasoline.
Accounts affected: Asset and Owner's Equity
• Analysis: Assets are decreased. Owner's Equity decreased.
• Rules: Decrease in assets are recorded by credits. Decrease in Owner's
Equity are recorded by debits.
• Entry: Decrease in Owner's equity is recorded by debit to Gas Expense.
Decrease assets is recorded by a credit to Cash

Date Account Title and Description P.R. Debit Credit

2019
Nov. 1 Gas Expense (OE-E) 1,500

Cash (A) 1,500

To record purchase of gas.
Nov 5 - Te pays P24,000 for 1 year insurance contract that protects her
business from Nov 1 until October 31 the following year.
Accounts Affected: Assets
• Analysis: Asset are increased. Another asset are decreased
• Rules: Increases in assets are recorded by debits. Decrease in assets are
recorded by credits.
• Entry: Increase in assets are recorded by debit to Prepaid Insurance.
Decrease assets is recorded by a credit to cash

Date Account Title and Description P.R. Debit Credit

2019
Nov. 1 Prepaid Insurance(A) 24,000

Cash (A) 24,000

To pay for insurance premium for 1
year.
Nov 8 - Te purchases P1,000 worth of office supplies for business' use on
account.
Accounts affected: Asset and Liability
• Analysis: Asset are increased. Liabilities are increased.
• Rules: Increases in assets are recorded by debits. Increases in liablities are
recorded by credits.
• Entry: Increase in assets are recorded by debit to Office Supplies . Increase
in Liabilities is recorded by a credit to Accounts Payable

Date Account Title and Description P.R. Debit Credit

2019
Nov. 8 Office Supplies (A) 1,000

Accounts Payable (L) 1,000

Purchase of Supplies on
account.
Nov 14 - The business provided welding services to 7 customers,
receiving P2,500 each.
Accounts affected: Asset d Owner's Equity
• Analysis: Assets are increased. Owners Equity increased.
• Rules: Increases in assets are recorded by debits. Increases in OE are
recorded by credit.
• Entry: Increase in assets is recorded by a debit to Cash. Increase in
Owner's Equity is recorded by a credit to Welding Revenue

Date Account Title and Description P.R. Debit Credit

2019
Nov. 1 Cash (A) 17,500
Welding Revenue (OE) 17,500
To record revenue from welding
services.
Nov 20 - Receive P13,500 from a customer for welding services to completed
in March 2020.
Accounts affected: Assets and Liability
• Analysis: Assets increased. Liabilities increased.
• Rules: Increase in assets are recorded by debits. Increase in liabilities are
recorded by credits.
• Entry: Increase in assets is recorded by a debit to Cash. Increase in liabilities is
recorded by a credit to Unearned Revenue.

Date Account Title and Description P.R. Debit Credit

2019
Nov. 20 Cash (A) 13,500
Unearned Revenue (L) 13,500
To record advance payment for
future welding services.
• Nov 22 - Te provided welding services for 8 clients, billing each one
at P2,500 each, but not cash was received.
• Accounts affected : Asset and Owner's Equity
• Analysis: Assets increased. Owner' Equity increased.
• Rules: Increase in assets are recorded by debits. Increase in Owner's
Equity are recorded by credits.
• Entry: Increase in assets is recorded by a debit to Accounts Receivable.
Increase in Owner's Equity is recorded by a credit to Welding Revenue.

Date Account Title and Description P.R. Debit Credit

2019
Nov. 1 Accounts Receivable (A) 20,000
Welding Revenue (OE-I) 20,000

To record welding services but

no payment was received.
Nov 26 - Te paid P4,000 salaries of part-time employee.
Accounts Affected: Asset and Owner' s Equity
• Analysis: Assets decreased. Owner' Equity decreased.
• Rules: Decrease in assets are recorded by credits. Decrease in Owner's
Equity are recorded by Debits.
• Entry: Decrease in Owner's Equity is recorded by a debit to Salaries
expense. Decrease in asset is recorded by a credit to Cash.

Date Account Title and Description P.R. Debit Credit

2019
Nov.26 Salaries Expense (OE-E) 20,000
Cash (A) 20,000

To record payment for salaries of

part-time employee.
Nov 28 - - Te pays P1,750 to print advertising flyers.
Accounts affected: Assets and Owner's Equity
• Analysis: Assets decreased. Owner' Equity decreased.
• Rules: Decrease in assets are recorded by credits. Decrease in Owner's
Equity are recorded by Debits.
• Entry: Decrease in Owner's Equity is recorded by a debit to Advertising
expense. Decrease in asset is recorded by a credit to Cash.

Date Account Title and Description P.R. Debit Credit

2019
Nov.26 Advertising Expense (OE-E) 1,750
Cash (A) 1,750
To record payment for
salaries of part-time employee.
• Accounts Receivable Partially Collected
• Nov 30 - 5 of 8 customers billed last Nov 22 each pay P2,500 each.
• Analysis: An asset increased. Another asset decreased.
• Rules: Increase in assets are recorded by debits. Decrease in Assets are
recorded by credits.
• Entry: Increase in assets is recorded by a debit to Cash. Decrease in
assets is recorded by a credit to Accounts Receivable.

Date Account Title and Description P.R. Debit Credit

2019
Nov.30 Cash (A) 12,500
Accounts Receivable (A) 12,500

To record partial collection of

receivables..