Professional Documents
Culture Documents
Accounting Chapter 3
Accounting Chapter 3
Accounting Chapter 3
Equity is affected by owner’s additional investment and
withdrawal. Equity is increased by investment and decreased by
withdrawal. Other than these two, any increase or decrease in equity can
Increased by:
Contributions and Income
Assets:
1. Cash, which comprises cash on hand and demand deposits.
2. Cash equivalents, are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
3. Accounts receivable, are open accounts from the sale of goods or
services in the ordinary course of business.
4. Notes receivable, are receivables supported by a promissory note.
5. Inventories, which are assets held for sale in the ordinary course of
business; in the process of production for such sale; or in the form
of materials or supplies to be consumed in the production process
or in the rendering of services.
6. Prepaid expense, are future expense that are already paid in
advance.
7. Property, plant and equipment, are tangible items that are held for
use in the production or supply of goods or services , for rental to
others, or for administrative purposes, and are expected to be used
for more than one accounting period.
8. Equity securities, are those that represent ownership in a company
or rights to acquire ownership interests at an agreed-upon or
determinable price.
9. Debt securities, are instruments representing creditor relationship
with an enterprise.
10. Intangible asset, an identifiable, non-monetary asset without
physical substance.
Liabilities:
1. Accounts payable, or trade accounts, are liabilities arising from the
Equity:
1. Dela Cruz, Capital, the equity or capital account of an owner over
an enterprise
2. Retained Earnings, is the accumulated profits and losses of an
enterprise from the time it started operations up to the current
period.
Income:
1. Service income, income earned after providing services to the
clients or customers.
2. Interest income, income earned from lending of money, computed
using a stated interest rate.
3. Rent income, income arising from the use of property.
4. Sales / Revenue, income arising from sale of goods in the normal
course of business.
5. Gain on sale or gain on disposal, the excess of the net selling price
over the carrying value of the asset disposed.
Expenses
1. Advertising expense, amount incurred in marketing or advertising a
product or service.
2. Cost of sales, the cost of services or products sold during the
current period.
3. Loss on sale, occurs when the carrying value of the asset disposed
exceed the net selling price.
4. Warranty expense, expense arising from the estimate of the repair
or service costs during a specified period if the products sold are
defective.
5. Salary expense, amount incurred to pay for the salaries of
employees during a specific period.
TRANSACTION ANALYSIS
January 3
Dolores contributed cash of P100,000, land worth P400,000, and office
building worth P300,000.
January 10
Dolores borrowed P250,000 cash from Metrobank for use in business.
January 13
Dolores bought tables and chairs for P125,000 cash and office equipment
in exchange for P200,000 notes payable.
Furniture P125,000
Equipment 200,000 = Notes payable P200,000 + No effect
Cash (125,000)
January 15
Dolores withdrew P10,000 from the business.
January 20
Dolores paid advertising cost of P15,000 to market the services of the
firm.
January 25
Dolores had its first customer. Dolores billed and collected from the
customer, P50,000
January 28
Dolores paid 50% of the notes payable.
January 29
Dolores paid 5,000 for water, electricity and telephone expenses.
January 31
Dolores paid the salary of her accounting staff in the amount of P15,000.
Assets Liabilities
Cash P 130,000 Notes payable P 100,000
Furniture 125,000 Loans payable 250,000
Equipment 200,000 Total liabilities 350,000
Building 300,000
Land 400,000 Equity
Debit Credit
(left) (right)
Debit Credit
Assets Liabilities and Equity
Using the foregoing diagram, assets are placed in the debit side
while liabilities and equity are in the credit side, which determine their
normal balances. Normal balance of assets is debit while the normal
balance of liabilities and equity is credit. It is important to identify the
normal balance of the accounts since accounts are increased if placed in its
normal balance. Therefore, assets accounts are increased if debited and
decreased if credited. Needless to say, liabilities and equity accounts
are increased if credited and decreased if debited.
Income increases equity, thus the rules on debit and credit for
equity also apply to income. On the other hand, expenses decrease equity
hence expenses are increased by debit and decreased by credit.
Asset
Debit Credit
increase decrease
Debit Credit
(left) (right)
Liability
Debit Credit
decrease increase
Equity
Debit Credit
decrease increase
Income
Debit Credit
decrease increase
Expense
Debit Credit
increase decrease
January 3
Dolores contributed cash of P100,000, land worth P400,000, and office
building worth P300,000.
Analysis:
Account Element Change Action
Cash Asset Increase Debit
Land Asset Increase Debit
Building Asset Increase Debit
Dolores, Capital Equity Increase Credit
Cash
100,000
Land
400,000
Building
300,000
Dolores, Capital
500,000
January 10
Dolores borrowed P250,000 cash from Metrobank for use in business.
Analysis:
Account Element Change Action
Cash Asset Increase Debit
Cash
250,000
Loan payable
250,000
January 13
Dolores bought tables and chairs for P125,000 cash and office equipment
in exchange for P200,000 notes payable.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Furniture Asset Increase Debit
Equipment Asset Increase Debit
Note payable Equity Increase Credit
Cash
125,000
Equipment
200,000
Furniture
125,000
Note payable
200,000
January 15
Dolores withdrew P10,000 from the business.
Cash
10,000
Dolores, Capital
10,000
January 20
Dolores paid advertising cost of P15,000 to market the services of the
firm.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Advertising Expense Expense Increase Debit
Cash
15,000
Advertising expense
15,000
January 25
Dolores had its first customer. Dolores billed and collected from the
customer, P50,000.
Analysis:
Account Element Change Action
Cash Asset Increase Debit
Service Income Income Increase Credit
Cash
50,000
January 28
Dolores paid 50% of the notes payable.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Note payable Liability Decrease Debit
Cash
100,000
Note payable
100,000
January 29
Dolores paid 5,000 for water, electricity and telephone expenses.
Analysis:
Account Element Change Action
Cash Asset Decrease Credit
Utilities Expense Expense Increase Debit
Cash
5,000
Utilities expense
5,000
January 31
Dolores paid the salary of her accounting staff in the amount of P15,000.
Analysis:
Cash
15,000
Salaries expense
15,000