FABM 1 Business Transactions & Analysis PDF

FABM 1: BUSINESS TRANSACTIONS AND THEIR ANALYSIS AS APPLIED IN THE ACCOUNTING CYCLE OF A SERVICE BUSINESS Lessons: 6.1 The Accounting Cycle 6.2 Identifying and Analyzing Transactions and Events 6.3 Journalizing Learning Competencies: Analyze common business transactions using the rules...

FABM 1: BUSINESS TRANSACTIONS AND THEIR ANALYSIS AS APPLIED IN THE ACCOUNTING CYCLE OF A SERVICE BUSINESS Lessons: 6.1 The Accounting Cycle 6.2 Identifying and Analyzing Transactions and Events 6.3 Journalizing Learning Competencies: Analyze common business transactions using the rules of debit and credit; and Solve simple problems and exercises in the analyses of business transaction 6.1 THE ACCOUNTING CYCLE DEFINITION The accounting cycle represents the steps or procedures used to record transactions and prepare financial statements. The accounting cycle implements the accounting processes of identifying, recording, and communicating economic information. STEPS IN THE ACCOUNTING CYCLE Identifying and analyzing business documents or transactions Recording of Journalizing reversing entries Preparing the post- closing trial Posting balance Preparing the Closing the books unadjusted trial balance Preparing the Preparing the financial adjusting entries statements Preparing the adjusted trial balance 1. Identifying and analyzing business documents and transactions The accountant gathers information from source documents and determines the effect of the transactions on the accounts. 2. Journalizing The identified accountable events are recorded in the journals. 3. Posting Information from the journal are transferred to the ledger. 4. Preparing the unadjusted trial balance The balances of the general ledger accounts are proved as to the equality of debits and credits. The unadjusted trial balance serves as the basis for adjusting entries. 5. Preparing the adjusting entries The accounts are updated as of the reporting date on an accrual basis by recording accruals, expiration of deferrals, estimations, and other events often not signaled by new source documents. 6. Preparing the adjusted trial balance The equality of debits and credits is rechecked after adjustments are made. The adjusted trial balance serves as the basis for the preparation of the financial statements. 7. Preparing the financial statements These are the means by which the information processed is communicated to users. 8. Closing the books This involves journalizing and posting closing entries and ruling the ledger. Temporary accounts (nominal accounts) are closed and the resulting profit or loss is transferred to an equity account. 9. Preparing the post-closing trial balance The equality of debits and credits is again rechecked after the closing process. 10. Recording of reversing entries Reversing entries are usually made at the beginning of the next accounting period to simplify the recording of certain transactions in that period. 6.2 IDENTIFYING AND ANALYZING TRANSACTIONS AND EVENTS This is the first step in the accounting cycle. It involves identifying a business transaction and analyzing whether or not that transaction affects the assets, liability, equity, income, or expenses of the business. A transaction that has an effect on the accounts is an "accountable event," which needs to be recorded in the books of accounts. On the other hand, a transaction that has no effect on the accounts is a "non-accountable event," which is not recorded in the books of accounts.  Transactions are normally identified from documents." Source documents are written evidences containing information about transactions. Source documents come in various forms which include, but not limited to, the following: ✓Sales invoice; ✓Official receipts; ✓Purchase orders; ✓Delivery receipts; ✓Bank deposit slips ✓Bank statements ✓Checks; ✓Statement of account, and the like SOURCE DOCUMENTS Sales Invoice vs. Official Receipt Sales invoices (SI) are used for the sale of goods, while Official receipts (OR) are used for the rendering of services. For example, if you buy groceries, the grocery store will issue you a sales invoice; if you pay your tuition fee in school, the school will issue you an official receipt. Purchase Order A purchase order is a document issued by the buyer to a seller indicating the types, quantities and agreed prices for products or services that the buyer intends to purchase. Purchase orders are prepared as internal control over purchases. For example, to prevent unnecessary purchases, you should require your personnel to prepare purchase orders for all the purchases of the business. Delivery Receipt A delivery receipt is a document signed by the receiver of the shipment acknowledging the receipt of the goods. Bank Deposit Slip A bank deposit slip evidences a deposit to a bank account. It shows the date of deposit, the bank account name and number, and the amount deposited. Bank Statement A bank statement is a report issued by a bank (on a monthly basis) that shows the deposits and withdrawals during the period and the cumulative balance of the depositor’s bank account. Check A check is an instrument that orders a bank (drawee) to pay the person named on the check or the bearer thereof (payee) a definite amount of money from the drawer’s bank account. Statement of Account A statement of account is a report a business sends to its customer listing the transactions with the customer during a period, the payments made by the customer, and any remaining balance due from the customer. A statement of account also serves as a notice of billing. For example, a school periodically issues statements of accounts to its students reminding them to settle any unpaid tuition fee. TYPES OF TRANSACTIONS/EVENTS External events – are transactions that involve the business and another external party. Examples include sale, purchase, borrowing of money, payment of liabilities, and the like. Internal events – are transactions that do not involve an external party. Examples include production and casualty losses (e.g., destruction of properties due to storms, earthquakes, and the like). 6.3 JOURNALIZING After an accountable event is identified and analyzed, the second step is to record it in the journal employing a journal entry. This recording process is called journalizing. A journal entry has the following format: The following are the parts of a journal entry: 1. Date – journal entries are recorded in the journal chronologically, that is, arranged according to the dates they are recorded. 2. Account titles and Amounts to be debited and credited – under the double-entry system, each transaction is recorded in the journal in two parts – debit and credit. 3. Short description of the transaction – this is provided for future reference. SIMPLE AND COMPOUND ENTRIES A journal entry may have one of the following formats: Simple journal entry – one that contains a single debit an a single credit element. Compound journal entry – one that contains two or more debits or credits ILLUSTRATION: Transaction #1: You provided ₱ 800 cash as initial investment to your business. Step #1: Business Transaction Analysis Accounts “Cash” (asset) and “Owner’s Capital” Affected: (equity) Effects on Cash is increased; Owner’s Capital is Accounts: increased. Debit/Credit Cash is debited; Owner’s Capital is credited. Step #2: Journal Entry JOURNAL Date Account Titles Debit Credit Jan. 1, 2023 Cash 800 Owner’s Capital 800 Initial investment to the business Transaction #2: The business obtained a loan of ₱ 1,200. Transaction #3: The business acquired the following for cash: Barbeque grill - ₱ 1,000 Cooking accessories - ₱ 120 Beach umbrella - ₱ 400 Transaction #4: The business purchased an inventory of ₱ 480 cash. Transaction #5: Total cash sales of barbeque amounted to ₱ 700. The total cost of the barbeques sold is ₱ 280. Transaction #3: The business acquired the following for cash: Barbeque grill - ₱ 1,000 Cooking accessories - ₱ 120 Beach umbrella - ₱ 400 Transaction #4: The business purchased an inventory of ₱ 480 cash. Transaction #5: Total cash sales of barbeque amounted to ₱ 700. The total cost of the barbeques sold is ₱ 280. Transaction #6: The business paid ₱ 20 for supplies expense. Transaction #7: The business purchased an inventory of ₱ 480 cash. Transaction #5: Total cash sales of barbeque amounted to ₱ 700. The total cost of the barbeques sold is ₱ 280. REFERENCES: Ferrer, R. & Millan, Z. V. (2019). Fundamentals of Accountancy, Business & Management Part 1. Bandolin Enterprise. Peralta, J., Valix, C. A., & Valix, C. (2020). Conceptual Framework and Accounting Standards. GIC Enterprise & Co., Inc. Ong, F. (2019). Fundamentals of Accountancy, Business, and Management 1 for Senior High School. C & E Publishing Inc.