BCC-FAR-Chapter-3-Recording-Business-Transactions PDF

FINANCIAL ACCOUNTING and REPORTING CHAPTER 3: Recording Business Transactions  1. Identify the transaction from source documents. 2. Indicate the accounts-either assets, liabilities, equity, income...

FINANCIAL ACCOUNTING and REPORTING CHAPTER 3: Recording Business Transactions  1. Identify the transaction from source documents. 2. Indicate the accounts-either assets, liabilities, equity, income or expenses- affected by the transaction. TRANSACTION ANALYSIS (Step 1) 3. Ascertain whether each account is increased or decreased by the transaction 4. Using the rules of debit and credit, determine whether to debit or credit the account to record its increase or decrease.  Account Title Ang na-K-raan: Debit side Credit side T- ACCOUNT (Left side) (Right side) Basic Concepts THE ACCOUNTING Assets = Liabilities + Owner’s Equity that you should EQUATION know by HEART. Sa kada may papasok na transaction/s THE DOUBLE- mayroon ding dapat lumabas. Maipapakita ito sa DUAL EFFECT ng ENTRY SYSTEM credit at debit side ng ALOE-CREW. Dapat lageng balance ang debit at NORMAL BALANCE EXPENSE credit. - Dito tumataas, DEBIT WITHDRAWALS nadadagdagan, at lumalakas Mnemonics: ASSETS ang isang partikular na (EWAN) NET LOSS BEGINNING CAPITAL balanse ng isang Account. [ALOE-CREW] (Assets, ADDITIONAL INVESTMENT CREDIT Liabilities, Owner’s Equity, REVENUE Mnemonics: Capital, Revenue, Expense, LIABILITIES (BARLON) OWNER’S EQUITY Withdrawal) NET INCOME  - These original written evidences contain information about the nature and the amounts of the transactions. - Pinanggalingan ng mga business transactions. - Mga proof o basis na nag exist yung mga Monetary/Financial transaction/s na irerecord mo sa General Journal. Sales Invoices Official Receipt SOURCE DOCUMENTS Purchase Order Statement of Account Bank Deposit Slips Ps: Other source documents sample can be seen on Checks page 317-onwards of our reference book  Aim: To gather information about transactions or 1 Identification of Events to be Recorded events generally through the source documents. Aim: To record the economic impact of transactions on the firm in a 2 Transactions are Recorded in the Journal journal, which is a form that facilitates transfer to the accounts. Aim: To transfer the information from the journal to 3 Journal Entries are Posted to the Ledger the ledger for classification. 4 Aim: To provide a listing to verify the equality of debits Preparation of a Trial Balance. and credits in the ledger. 5 Preparation of the Worksheet including Aim: To aid in the preparation of financial statements Adjusting Entries. 6 Preparation of the Financial Statements Aim: To provide useful information to decision-makers. Adjusting Journal Entries are Journalized Aim: To record the accruals, expiration of deferrals, 7 and Posted estimations and other events from the worksheet. Closing Journal Entries are Journalized and Aim: To close temporary accounts and transfer profit to 8 Posted owner's equity. 9 Aim: To check the equality of debits and credits after Preparation of a Post-Closing Trial Balance the closing entries. Reversing Journal Entries are Journalized Aim: To simplify the recording of certain regular 10 and Posted transactions in the next accounting period.  For steps 2, 3, and 4, kindly refer to the diagram below: 2 GENERAL JOURNAL Shows all the effects of a transaction (The book of Original Entry) in terms of debits and credits. Example: Office Equipment xx,xxx Cash xx,xxx Accounts Payable xx,xxx CASH 4 TRIAL BALANCE OFFICE (ALOE-CREW) EQUIPMENT POSTING Assets Transferring the amounts Liability ACCOUNTS Owner’s Equity from the general journal to appropriate accounts in the ledger. PAYABLE Capital Revenue 3 Expense LEDGER Withdrawal A grouping of accounts. Used to classify and summarize transactions and to prepare Listing of all ledger accounts, data for basic financial in order, with their respective statements. debit or credit balances. 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. Each transaction is initially recorded in a journal rather than directly in the ledger. A journal is called the book of original entry. The nature and volume of transactions of the business determine the number and type of journals needed. The GENERAL JOURNAL is the simplest journal. The year and month are not rewritten for every entry 1. Date unless the year or month changes or a new page is needed. The account to be debited is entered at the extreme left of 2. Account Titles the first line while the account to be credited is entered FORMAT and Explanation slightly indented on the next line. A brief description of the The standard transaction is usually made on the line below the credit. contents of the Generally, skip a line after each entry. general journal 3. P. R. (Posting This will be used when the entries are posted, that is, until are as follows: Reference) the amounts are transferred to the related ledger accounts. The posting process will be described later. 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. Assume that Pao Cads established his own wedding consultancy with an initial investment of P250,000 on May 1. The journal entry is shown below: Date Account Titles and Explanation P.R. Debit Credit 2024 May 01 Cash P 250,000.00 Cads, Capital P 250,000.00 To record initial investment. Simple and Compound Entry In a simple entry, only two accounts are affected-one account is debited and the other account credited. An example of this is the entry to record the initial investment of Pao Cads. However, some transactions require the use of more than two accounts. When three or more accounts are required in a journal entry, the entry is referred to as a compound entry. Example – 1 debit 2 credit Office Equipment P 500,000 Journal Entry from Previous slide Cash 200,000 Accounts Payable 300,000 Cash P 250,000 To record purchase of equipment, 40% cash, 60% on credit/on Cads, Capital 250,000 account. To record initial investment. or Example – 2 debit 1 credit Cash 50,000 Accounts Receivable 150,000 Revenue 200,000 To record service rendered, 25% and the remaining on account.  (Step 2) After the transaction or event has been identified and measured, it is recorded in the journal. The process of recording a transaction is called. The following are the transactions for Weddings "R" Us during the month of May. The double-entry system will be used. To understand the nature of the affected accounts, the letter A (for asset), L (liability) or OE (owner's equity) is inserted after each entry. In addition, owner's equity is further classified into OE:I (income) and OE:E (expenses). 1. Two or more accounts are affected by each transaction. Note that the rules of double-entry 2. The sum of the debits for every transaction equals the system are observed sum of the credits. in each transaction: 3. The equality of the accounting equation is always maintained.  (Source of Assets) Dr. Rose Besario is a social entrepreneur from the South. She is into a lot of interesting causes. Her fine taste is preeminent such that she is considered an authority in planning weddings. She does not intend to May 01 "charge much". Upon the advice and prodding of an esteemed colleague, Dr. Yolanda Sayson, Besario decided to organize her wedding consultancy. She invested P250,000 into this entity. Analysis Assets increased. Owner's equity increased. Increases in assets are recorded by debits. Increases in owner's Rules equity are recorded by credits. Increase in assets is recorded by a debit to cash. Increase in owner's Entry equity is recorded by a credit to Besario, Capital. Dr. Cr. Cash (A) 250,000 Besario, Capital (OE) 250,000  (Exchange of Assets) May 01 Rented office space and paid two months' rent in advance, P8,000. Analysis Assets increased. Assets decreased. Increases in assets are recorded by debits. Decreases in assets are Rules recorded by credits. Increase in assets is recorded by a debit to prepaid rent. Decrease in Entry assets is recorded by a credit to cash. Dr. Cr. Prepaid Rent (A) 8,000 Cash (A) 8,000  (Source of Assets) Rose Besario issued a promissory note for a P210,000 loan from Metrobank. This availment will be used for the acquisition of a service vehicle. The note carries a May 02 20% interest per annum. The arrangement with the bank is that both the interest and the principal are payable in full in one year. Analysis Assets increased. Liabilities increased. Increases in assets are recorded by debits. Increases in liabilities are Rules recorded by credits. Increase in assets is recorded by a debit to cash. Increase in liabilities is Entry recorded by a credit to notes payable. Dr. Cr. Cash (A) 210,000 Notes Payable (L ) 210,000  (Exchange and Source of Assets) Acquired office equipment from Fair and Square Emporium for P60,000; May 05 paying P15,000 in cash and the balance next month. Note: A compound entry is needed for this transaction. Analysis Assets increased. Assets decreased. Liabilities increased. Increases in assets are recorded by debits. Decreases in assets are Rules recorded by credits. Increases in liabilities are recorded by credits. Increase in assets is recorded by a debit to office equipment. Decrease Entry in assets is recorded by a credit to cash. Increase in liabilities is recorded by a credit to accounts payable. Dr. Cr. Office Equipement (A) 60,000 Cash (A) 15,000 Accounts Payable (L) 45,000  (Source of Assets) Coordinated and finalized simple bridal arrangements for three couples and collected fees of P8,800 per couple. Services include prospecting and selecting May 10 the church and reception location, couturier, caterer, car service, flowers, souvenirs and invitations. Analysis Assets increased. Owner's equity increased. Increases in assets are recorded by debits. Increases in owner's equity Rules are recorded by credits. Increase in assets is recorded by a debit to cash. Increase in owner's Entry equity is recorded by a credit to consulting revenues. Dr. Cr. Cash (A) 26,400 Consulting Revenues (OE:I) 26,400  (Source of Assets) The entity is earning additional revenues by referring consulting clients to May 15 friendly hotels, caterers, printers, and couturiers. Received P10,000 advance fees for three clients referred. Analysis Assets increased. Liabilities increased. Increases in assets are recorded by debits. Increases in liabilities are Rules recorded by credits. Increase in assets is recorded by a debit to cash. Increase in liabilities is Entry recorded by a credit to unearned referral revenues. Dr. Cr. Cash (A) 10,000 Unearned Referral Revenues (L) 10,000  (Use of Assets) May 25 Besario withdrew P14,000 for personal expenses. Analysis Assets decreased. Owner's equity decreased. Decreases in assets are recorded by credits. Decreases in owner's equity Rules are recorded by debits. Decrease in owner's equity is recorded by a debit to Besario, Entry Withdrawals. Decrease in assets is recorded by a credit to cash. Dr. Cr. Besario, Withdrawals (OE) 14,000 Cash (A) 14,000  A grouping of the entity's accounts is referred to as a LEDGER. Although some firms may use various ledgers to accumulate certain detailed information, all firms have a general ledger. A 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. 1. Balance sheet or Permanent accounts (assets, liabilities and owner's equity) The accounts in the general ledger are 2. income statement or Temporary accounts (income and classified into two expenses). Temporary or nominal accounts are used to general groups: 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. Each account has its own record in the ledger. Every account in the ledger maintains the basic format of the T-account but offers more information (e.g. the account number at the upper right corner and the journal reference column). Compared to a journal, a ledger organizes information by account.  A listing of all the accounts and their account numbers in the ledger is known as the chart of accounts. The chart is arranged in the financial statement order, that is, assets first, followed by 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 may be added. Presented below is the chart of accounts for the illustration: