CHAPTER V

ANALYZING AND RECORDING BUSINESS TRANSACTIONS

OF A SERVICE BUSINESS

Learning Outcomes

At the end of the chapter, learners shall be able to:

 Define double-entry bookkeeping and explain the rules of debit and credit;
 Differentiate simple journal entry from compound journal entry;
 Enumerate the pro forma entries in recording business transactions; and
 Demonstrate how business transactions are recorded in the general
journal.

Double Entry Bookkeeping System

The accounting values are affected by the transactions or economic

activities occurring daily in a business. A transaction is characterized by an
exchange of values between two parties expressed in terms of money.

There must be an exchange of values. This means that for every value
received by the business there must be an equal value parted with. This is the
dual effect of a business transaction which gives rise to the bookkeeping system
called Double Entry Bookkeeping. This system reflects the two-fold effect of a
business transaction. A transaction either increases or decreases the assets,
liabilities or owner’s equity but the equality of the equation or equilibrium among
the elements should always be maintained. Another feature is that, in every
transaction, there are at least two parties involved.

Rules of Debit and Credit

Business transactions cause increases and decreases in the accounting

values. To record these changes, a business makes use of accounts. An
account is an accounting device used to summarize the increases and
decreases in the asset, liability and owner’s equity of the business.

A sample for the account looks like a big letter “T”, thus it is called a “T-
account”. It has a left side and a right side. It appears as follows:

Account Title

left side right side

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 The left side of a T-account is the debit (abbreviated as Dr.) side and the
right side is the credit (abbreviated as Cr.) side. Using the T-account, to debit is
to enter the amount on the left side of the T-account and to credit is to enter on
the right side of the T- account. The amounts entered on the left side of a T-
account are debits and those on the right side are credits. To debit is to record
the value received and to credit is to record the value parted with.

To debit and to credit should not be confused with “to increase” or “to
decrease”. To debit and to credit may mean either a decrease or an increase
depending on the accounts affected.

The rules of debit and credit are as follows.

DEBIT CREDIT
1. Increase in assets 1. Decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease in owner’s equity due to 3. Increase in owner’s equity due to
a. withdrawal of assets a. investment
b. increase in expenses and losses b. decrease in expenses and
c. decrease in income losses
c. increase in income

Journalizing Transactions Using General Journal

Journalizing is the process of recording business transactions in a

journal. A journal is a book of accounts wherein business transactions are
recorded for the first time thus, it is also called the book of original entry.

A journal entry is a record of business transactions in the journal. There

are two types of journal entry: the simple journal entry which contains only one
debit and one credit account, and the compound journal entry which contains
either one debit and two or more credits; or two or more debits and one credit; or
two or more debits and two or more credits.

Examples are as follows:

Simple journal entry Compound journal entry

Cash xx Cash xx
X, Capital xx Furniture & Fixtures xx
X, Capital xx

Accounts Payable xx Cash xx

Cash xx Equipment xx
Accounts Payable xx
X, Capital xx

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Need for a Journal

1. To provide in one place a complete record of each transaction. This will put
together the debits and credits of the transactions.

2. The records make it possible to trace the debits and credits of the accounts
when errors are committed.

General journal is the simplest form of journal wherein the two-money

column form is used.

It contains the following columns:

GENERAL JOURNAL

Date Account Titles and F Debit Credit

Explanation

Date is where the date of the transaction is entered. Transactions are recorded
in a systematic manner and in a chronological order.

Account Titles and Explanation contains the accounts debited and credited
and a brief explanation of the entries.

Folio contains the post reference number of the ledger page to which the
accounts are transferred.

Debit contains the amount debited.

Credit contains the amount credited.

PROCEDURES IN JOURNALIZING

A. Under the date column

1. The year is written in small figures at the top of the first column.
2. The month of the transaction is written on the first line of the column.
The year and the month are not repeated except at the top of a new
page or when there is change in the month.

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 3. The date of each transaction is written in the right sub-column on the
date column. The date of the transaction occurring on the same day is
not repeated.

B. Under the account titles and explanation column

1. The name of the account debited is written first at the left margin of the
account titles and explanation column.
2. The name of the account credited is written on the following line
indented about-one-half inch from the left margin.
3. The explanation is placed on the next line, indented about one-inch from
the left margin. The explanation should be brief but sufficient enough to
explain the entry.

C. Under the debit column

1. The debit amount is written on the debit column opposite the debit
account.

D. Under the credit column

1. The credit amount is written on the credit column opposite the credit
account.

E. Under the folio column

1. The folio or reference column is used to indicate the page number of the
ledger to which the entry is transferred.
2. There is no entry yet in the folio column when transactions are recorded
in the general journal. However, when the entries are transferred from
the journal to the ledger, the page number of the ledger accounts to
which the debits and credits are copied is entered in the folio column.

Note: A single space should be left blank after each entry.

ENTRIES FOR SPECIFIC TRANSACTIONS

A. INVESTMENT BY THE OWNER

To start the business, the owner may invest cash or non-cash assets. As
stated in previous discussions, the business has a separate and distinct
personality from the owner therefore, in the analysis of transactions, the point of
view of the business is taken and not the owner.

Illustration: Mr. X invested P100,000 cash in a service business.

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Cash 100,000
Increase in Capital X, Capital 100,000

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 If non-cash assets were invested into the business, it would require a
debit to the specific account invested and a credit to capital.

Illustration: Mr. X invested equipment - P50,000; furniture and fixtures –

P35,000 and supplies worth P15,000.

Analysis of Transaction Accounts Titles Dr Cr

Increase in Assets Equipment 50,000
Furniture & Fixtures 35,000
Supplies 15,000
Increase in Capital X, Capital 100,000

B. Withdrawal by the Owner

If the proprietor withdraws cash or other assets from the business for
personal use, the amount is to be deducted from the owner’s equity.

Illustration: Mr. X withdrew P3,000 for personal use.

Analysis of Transaction Accounts Titles Dr Cr

Decrease in Capital X, Drawing 3,000
Decrease in Asset Cash 3,000

If non-cash assets were withdrawn instead of cash, the appropriate

account should be credited.

Illustration: Mr. X withdrew furniture and fixtures worth P3,000 for personal
use.

Analysis of Transaction Accounts Titles Dr Cr

Decrease in Capital X, Drawing 3,000
Decrease in Asset Furniture & Fixtures 3,000

C. Purchase of Non-Merchandise Assets

The business buys assets other than merchandise to be used in the

operation of the business. Assets may be acquired on cash basis, on account,
by issuing a promissory note or a combination of these.

Acquisition on Cash Basis. The buyer pays cash upon purchase of the asset.

Illustration: The business purchased furniture and fixtures worth P40,000 on

cash basis.

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Furniture & Fixtures 40,000
Decrease in another form of asset Cash 40,000

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Acquisition on Account. The buyer receives the asset but does not pay cash
upon receipt. The payment will be made in the future.

Illustration: Assume that the business acquired equipment worth P38,000 on

account.

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Equipment 38,000
Increase in Liability Accounts Payable 38,000

If the assets are acquired through the issuance of a promissory note,

where the buyer agrees to pay a sum of money at a certain future date, the
credit will be to Notes Payable instead of Accounts Payable.

Illustration: Assume that the business acquired equipment worth P38,000 and
issued a 30-day non-interest bearing note.

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Equipment 38,000
Increase in Liability Notes Payable 38,000

D. Payment of Expenses

Illustration: Paid P2,000 for rent.

Expense Method:
Analysis of Transaction Accounts Titles Dr Cr
Increase in Expense Rent Expense 2,000
Decrease in Asset Cash 2,000

Asset Method:
Analysis of Transaction Accounts Titles Dr Cr
Increase in Asset Prepaid Rent 2,000
Decrease in another Asset Cash 2,000

In the expense method, the Rent Expense account is debited upon

payment, while in the asset method, the account Prepaid Rent is used.

E. Collection of Accounts

When services were rendered on account or on credit, upon collection,

the business recognizes the receipt of cash and the cancellation of the right to
collect.

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Illustration: On February 1, 2023, the business rendered laundry services to
ISCC on account, P12,000.

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Accounts Receivable 12,000
Increase in Income Service Income 12,000

On February 20, 2023, ISCC paid the account in full.

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Cash 12,000
Decrease in another asset Accounts Receivable 12,000

If on February 20, 2023 ISCC made partial payment of P8,000 and full
payment on Feb 28, 2023, the entries are:

February 20, 2023:

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Cash 8,000
Decrease in another asset Accounts Receivable 8,000

February 28, 2023:

Analysis of Transaction Accounts Titles Dr Cr

Increase in Asset Cash 4,000
Decrease in another asset Accounts Receivable 4,000

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