Module 2 – Analysis of Business Transactions

Module 2

Analysis of Business Transactions

Learning Objective:

After studying module 2, the students should be able to:

a. Define business transactions

b. Analyze business transactions in terms of value received and value given away or value parted
with.
c. Discuss the basic accounting equation.
d. Analyze business transactions in terms as to its effect on the accounting equation.
e. Analyze transactions in terms of debit and credit.

BUSINESS TRANSACTIONS

A business transaction is defined as any activity in business that involves the buying and
selling of goods and services. It is an event that has some effect on the resources of a firm or on
the source of the firm’s assets. It is also an activity that involves exchange of values.. When the
transaction is between a business and an outsider, it is an external transaction. An example of it
is a purchase of office supplies from National Bookstore. Transactions that happen within the
business that do not involve outsiders are called internal transactions. An example of it, is office
supplies being used daily in the operations of the business.

The evidence of transaction that describes the essential facts of the transaction is the
source document. Examples of source documents are receipts of cash paid or received, check
written or received, bills sent to customer for services performed or bills received from supplier
for items purchased, cash register tapes, sales tickets and notes given or received. Each source
document initiates the process of recording a transaction.

ANALYZING BUSINESS TRANSACTIONS

In order to generate financial reports which will be used for making decisions, business
transactions have to be analyzed, recorded and summarized. In analyzing transactions, the
suggested procedures are as follows:

a. Determine the particular accounts affected or involved in the transaction. There are always
two or more accounts involved in every transaction.

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Module 2 – Analysis of Business Transactions

b. Determine the effect of the transaction o the accounts involved in terms of increase or
decrease.

THREE WAYS OF ANALYZING BUSINESS TRANSACTIONS

1. Analysis of business transactions as to value received and value given away or value
parted with

2. Analysis of business transactions as to the effect on the accounting equation.

3. Analysis of business transactions as to debit and credit

ANALYSIS OF BUSINESS TRANSACTIONS AS TO VALUE RECEIVED AND VALUE

GIVEN AWAY OR VALUE PARTED WITH

Normally, business transactions are viewed as having twofold effect. It involves the receipt
of one value (value received) in exchange for another value (value given away or value parted
with) which are presumed to be equal.

The specific accounts affected or involved, classification as to elements of financial statements,

and the effects of the business transactions on the said accounts are illustrated as follows:

1. Investment transaction

Transaction: On March 1, 2019, Ms. Maila Bahin started a laundry business under the
name Dadami Lilinis Laundry Shop by investing P 100,000- cash.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 1 VR Cash 100,000 Asset Increase

VGA Maila Bahin, Capital 100,000 Capital Increase

2. Acquisition of Assets

a. For cash

Transaction: On March 5, bought from Groovy Merchandising laundry soap, fabric

softener and other detergents needed in the laundry business P20,000.

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Module 2 – Analysis of Business Transactions

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 5 VR Laundry Supplies 20,000 Asset Increase

VGA Cash 20,000 Asset Decrease

b. On account/

Transaction: On March 8, bought washing machines, dryers for P60,000- on account from
Handyman Appliances Store.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 8 VR Laundry Equipment 60,000 Asset Increase

VGA Accounts Payable 60,000 Liabilities Increase

Transaction: On March 10, bought display cases, tables and chairs P50,000.- on account
from Shoppee Appliances.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 8 VR Furniture & Fixtures 50,000 Asset Increase

VGA Accounts Payable 50,000 Liabilities Increase

3. Services rendered/Selling of goods

a. For cash

Transaction: On March 13, Received P15,000 cash for services rendered from
Imperial Restaurant.

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Module 2 – Analysis of Business Transactions

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 13 VR Cash 15,000 Asset Increase

VGA Laundry Shop Income 15,000 Revenue Increase

b. On account

Transaction: On March 15, Rendered services on account to Max’s Store worth

20,000.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 15 VR Accounts Receivable 20,000 Asset Increase

VGA Laundry Shop Income 20,000 Revenue Increase

4. Payment of expenses

Transaction: On March 18, Paid rent for the month worth P8,000.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 18 VR Rent Expense 5,000 Expense Increase

VGA Cash 5,000 Asset Decrease

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Module 2 – Analysis of Business Transactions

Transaction: On March 18, Paid electricity and water billings for the period covered
February 9 to March 10, 2020 worth P5,000.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 18 VR Utilities Expense 5,000 Expense Increase

VGA Cash 5,000 Asset Decrease

5. Payment of liabilities or payables or obligations

Transaction: On March 25, Paid Handyman Appliances Store in full for the shop
equipment acquired last March 8.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 25 VR Accounts Payable 60,000 Liabilities Decrease

VGA Cash 60,000 Asset Decrease

6. Collection of receivables

Transaction: On March 28, Collected from Max’s Store the amount of P20,000.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 28 VR Cash 20,000 Asset Increase

VGA Accounts Receivable 20,000 Asset Decrease

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Module 2 – Analysis of Business Transactions

7. Withdrawal of the owner for personal use

Transaction: On March 31, Ms. Maila Bahin, the owner, withdraws P3,000, for personal
use.

Date Analysis Accounts Affected Amount Account Effects

Classification
(Increase/Decrease)

2019

March 31 VR MailaBahin, Drawing 20,000 Capital Decrease

VGA Cash 20,000 Asset Decrease

ANALYSIS OF BUSINESS TRANSACTION AS TO THE EFFECT ON THE

ACCOUNTING EQUATION

Conservatism

One of the fundamental principles behind financial accounting for businesses is conservatism.
Simply put, conservatism means a business never wants to overstate good things, such as the
value of its assets or the amount of its revenue and profit, and it never wants to understate bad
things, such as its expenses or the extent of its liabilities. When it comes to assets, accounting
conservatism requires that they be listed on the balance sheet with a value that can be
objectively determined.

Accounting Value

In most cases, the accounting value of an asset is the price the company paid to acquire it,
referred to as "historical cost." That price is verifiable and objective -- the sale is proof of value
-- so using it conforms to conservatism. As an asset ages, it gets depreciated, so its book value
declines. At any point, the asset might well be worth more than its accounting value, but the
only way to be absolutely sure is to sell the asset. Some incredibly valuable assets can't go on
the balance sheet at all because there is no way to satisfy conservatism's demand for objective
value. Brand names, trademarks, reputation and similar "intangibles" have no accounting value
to the company that generated them. Only after an intangible has been sold can it be given an
accounting value.

Double Entry – Accounting

Double entry, a fundamental concept underlying present-day bookkeeping and accounting, states
that every financial transaction has equal and opposite effects in at least two different accounts.
It is used to satisfy the accounting equation:

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Module 2 – Analysis of Business Transactions

The Accounting Equation

The relationship among assets, liabilities, and owner's equity can be written as an equation and
is stated as:

ASSETS = LIABILITIES + CAPITAL

The accounting equation must be in balance to be correct. Thus, the total of the accounts
on the left side of the equation must always be equal with the total of the accounts on the right
side of the equation. The resources of the business (assets) must always be equal with the
financial rights (equities) over those resources, those of the creditors (liabilities) and of the owner's
(capital).

Effects of Business Activities on the Accounting Equation

All business activities that are of financial in nature affect the accounting equation and
they are called business transactions. The peso as a unit of measurement is used in the
Philippines to measure the financial transactions. Business transactions are analyzed with respect
to its effect on the assets, liabilities and owner's equity. Transactions are analyzed as to its effect
on the business and not with the owner's personal record. The transaction may affect two or more
items in the equation and the equality of the sides of the equation must be maintained.

A record summarizing all the effects of business transaction pertaining to a single item in
the accounting equation is called an account. The name given to an account is called account
title. Accounts comprising each item in the accounting equation was earlier given in the discussion
on Elements of Financial Statements.

Business transactions may have the following effects on the accounting equation:

1. On Balance Sheet accounts:

a. Increase in asset = Increase in capital

Transaction: On March 1, 2019, Ms. Maila Bahin started a laundry business under the
name Dadami Lilinis Laundry Shop by investing P 100,000- cash.

Analysis: Before the investment was made, the accounting equation was

Assets = Liabilities + Capital

0 0 0

After the investment, the accounting equation would be

Date Assets = Liabilities + Capital

Cash = Maila Bahin, Capital
March 1 100,000- = 0 P 100,000-

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b. Increase in asset = decrease in another assets

Transaction: On March 5, bought from Groovy Merchandising laundry soap, fabric

softener and other detergents needed in the laundry business P20,000.

Analysis: The transaction resulted in the increase in an asset Shop Supplies and a
decrease in another asset cash which was used to pay for the acquisition. Thus,

Assets = Liabilities + Capital

Date Cash + Laundry Supplies = Accounts Payable Maila Bahin, Capital
March 1 P 100,000- = 0 + P 100,000-
5 ( 20,000-) P 20,000-
Balance P 80,000- + P 20,000- = + P 100,000-

c. Increase in asset = Increase in Liabilities

Transaction: On March 8, bought washing machines, dryers for P60,000- on account

from Handyman Appliances Store.

Analysis: Before services could be rendered, equipment (asset) needed have to be

purchased and since sizeable amount is needed, it was acquired on account which would
be paid later. Thus, the equation would now be

Assets = Liabilities + Capital

Date Cash + Laundry Supplies + Laundry Equipment = Accounts Payable Maila Bahin, Capital
March 1 P 100,000- = 0 + P 100,000-
5 ( 20,000-) P 20,000- =
Balance P 80,000- + P 20,000- = + P 100,000-
8 P60,000- P 60,000
Balance P 80,000- + P 20,000- + P 60,000- = P 60,000- + P 100,000-

d. Decrease in asset = Decrease in liabilities

Transaction: On March 25, Paid Handyman Appliances Store an amount of P30,000 in

partial payment for the shop equipment acquired last March 8.

Assets = Liabilities + Capital

Date
Cash + Laundry Supplies + Laundry Equipment = Accounts Payable Maila, Bahin,, Capital
March 1 P 100,000- = 0 + P 100,000-
5 P 60,000- = P 60,000-
Balance P 100,000- + + P 60,000- = P 60,000- + P 100,000-
8 ( 20,000-) P 20,000-
Balance P 80,000- + P 20,000- + P 60,000- = P 60,000- + P 100,000-
25 ( 30,000-) ( 30,000-)
P 50,000- + P 20,000- + 60,000- = P 30,,000- + P 100,000-

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Analysis: The payment made to the creditor decreases the cash (asset) available for use
by the business and at the same time reduces the amount owed (liabilities). Thus,

e. Decrease in asset = Decrease in capital

Transaction: On March 31, Ms. Maila Bahin, the owner, withdraws P3,000, for personal
use.

Analysis: Assets taken out from the business for personal use are called withdrawals. The
withdrawal decreases the balance of the asset withdrawn and so does the owner's equity.

Assets = Liabilities + Capital

Date Cash + Laundry Supplies + Laundry Equipment = Accounts Payable Maila Bahin, Capital
March
= 0
1 P 100,000- + P 100,000-
5 P 60,000- = P 60,000-
Balance P 100,000- + + P 60,000- = P 60,000- + P 100,000-

8 ( 20,000-) P 20,000-
Balance P 80,000- + P 20,000- + 60,000- = P 60,000- + P 100,000-
25 ( 30,000-) ( 30,000-)
Balance P 50,000- + P 20,000- + P 60,000- = P 30,000- + P 100,000-
31 ( 3,000-) ( 3,000-) drawing
Balance P 47,000- + P 20,000- + P 60,000- = P 30,000- + P 97,000-

2. On Income Statement accounts:

The owner’s capital changes as affected by business operations. Revenue and Expenses
affects the owner's equity and therefore the accounting equation may be expanded as follows:

ASSETS = LIABILITIES + (CAPITAL + Expenses)

a. Increase in asset = Increase in capital

Transactions:

March 13 - Received P15,000 cash for services rendered from Imperial Restaurant.

March 15 - Rendered services on account to Max’s Store worth 20,000.

Analysis: A transaction for the sale of goods or service results in the increase of an
asset, Accounts Receivable, and increase in owner's equity. The increase in equity
resulting from the operation of the business is called revenue. Thus,

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Module 2 – Analysis of Business Transactions

Assets = Liabilities + Capital

Date Accounts
Cash + Receivable
+ Laundry Supplies + Laundry Equipment = Accounts Payable Maila Bahin, Capital
March
P 100,000- = 0
1 + P 100,000-
5 P 60,000- = P 60,000-
Balance P 100,000- + + + P 60,000- = P 60,000- + P 100,000-
8 ( 20,000-) P 20,000-
Balance P 80,000- + + P 20,000- + 60,000- = P 60,000- + P 100,000-
13 15,000- 15,000- revenue
Balance P 95,000- + P 20,000- + P 60,000- = P 60,000- + P 115,000-
15 + P20,000- 20,000- revenue
Balance P 95,000.- + P20,000- + P 20,000- + P 60,000.- = P 60,000- + P 135,000-

b. Decrease in asset = Decrease in capital

Transactions:

March 15 - Paid the wages of shop helpers P 3,000-

March 18 - Paid rent for the month worth P8,000.

Analysis: The transaction to pay for goods or services needed to operate a business
results to a decrease in asset and a decrease in capital. The decrease in owner's equity
resulting from the operation of the business is called expense.

Assets = Liabilities + Capital

Accounts
Date Cash +
Receivable
+ Laundry Supplies + Laundry Equipment = Accounts Payable Maila Bahin, Capital
March
P 100,000- = 0
1 + P 100,000-
5 P 60,000- = P 60,000-
Balance P 100,000- + + + P 60,000- = P 60,000- + P 100,000-
8 ( 20,000-) P 20,000-
Balance P 80,000- + + P 20,000- + 60,000- = P 60,000- + P 100,000-
13 15,000- 15,000- revenue
Balance P 95,000- + P 20,000- + P 60,000- = P 60,000- + P 115,000-
+
15 P20,000- 20,000- revenue
+
P 95,000.- + P 20,000- + P 60,000.- = P 60,000-
Balance P20,000- + P 135,000-
15 ( 3,000-) ( 3,000-) wages Exp.
+
P 92,000- + P 20,000- + P 60,000.- = P 60,000-
Balance P20,000- P 132,000-
18 ( 8,000-) ( 8,000-) rent exp.
+
P 84,000- + P 20,000- + P 60,000.- = P 60,000-
Balance P20,000- P124,000-

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Module 2 – Analysis of Business Transactions

c. Increase in liabilities = Decrease in capital

Transaction: March 18 - Received electricity and water billings for the period covered
February 9 to March 10, 2020 worth P5,000 to be paid early next month.

Analysis: The transaction to pay even on later date for goods or services needed to
operate a business results to an increase in liability and a decrease in capital. The
obligation to pay already exist and thus a liability is to be recognized. Thus,

Assets = Liabilities + Capital

Accounts
Date Cash + + Laundry Supplies + Shop Equipment = Accounts Payable Maila Bahin, Capital
Receivable
March
P 100,000- = 0
1 + P 100,000-
5 P 60,000- = P 60,000-
P 100,000- + + + P 60,000- = P 60,000-
Balance + P 100,000-
8 ( 20,000-) P 20,000-
P 80,000- + + P 20,000- + 60,000- = P 60,000-
Balance + P 100,000-
13 15,000- 15,000- revenue
P 95,000- + P 20,000- + P 60,000- = P 60,000-
Balance + P 115,000-
15 + P20,000- 20,000- revenue
P 95,000.- + P20,000- + P 20,000- + P 60,000.- = P 60,000-
Balance + P 135,000-
15 ( 3,000-) ( 3,000-) wages exp.
P 92,000- + P20,000- + P 20,000- + P 60,000.- = P 60,000-
Balance P 132,000-
18 ( 8,000-) ( 8,000-) rent exp.
P 84,000- + P20,000- + P 20,000- + P 60,000.- = P 60,000-
Balance P124,000-
18 ( 5,000-) ( 5,000-) utilities exp..
P 84,000- + P20,000- + P 20,000- + P 60,000.- = P 65,000-
Balance P119,000-

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Module 2 – Analysis of Business Transactions

A summary of the tabular analysis of the effects of business transactions on the accounting
equation is provided below:

Assets = Liabilities + Capital Notations

Laundry Laundry
Date Accounts Supplies
+
Equipment Accounts Maila Bahin,
Receivable Payable Capital
March 1 100,000 = - + 100,000.00 Investment

5 60,000.00 = 60,000.00

8 -20,000 20,000.00

13 15,000 15,000.00 Laundry Shop Revenue

15 + 20,000.00 20,000.00 Laundry Shop Revenue

15 -3,000 - 3,000.00 Wages Expense

18 -8,000 - 8,000.00 Rent Expense

18 5,000.00 - 5,000.00 Utilities Expense

25 -30,000 - 30,000.00

31 -3,000 - 3,000.00 Maila Bahin, Drawing

51,000 20,000.00 20,000.00 60,000.00 35,000.00 116,000.00

Total Assets = (51,000 + 20,000 + 20,000 + 60,000) = 151,000.00

Total Liabilities and Capital = 35,000 + 116,000) = 151,000.00

Based on the tabular analysis, the financial statements for the month ended March 31, 2019 will
be as follows:

Dadami Lilinis Laundry Shop

Statement of Comprehensive Income
For the month ended March 31, 2019

Laundry Shop Revenue P 35,000.00

Less: Operating Expenses

Rent Expense P 8,000.00
Utilities Expense 5,000.00
Salaries Expense 3,000.00
Total Operating Expenses 16,000.00
NET INCOME P 19,000.00

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Module 2 – Analysis of Business Transactions

The Statement of Comprehensive Income, is prepared first to determine the net income
or net loss to be reflected in the Statement of Owner’s Equity or the Capital Statement. In the
above statement, the operation resulted to a net income because the total revenues exceed total
expenses. If total expenses exceeds the total revenues, a net loss resulted thus the final figure
should be enclosed by parenthesis to show a negative figures. If possible expenses should be
arranged from biggest to smallest amounts except Miscellaneous Expense which is listed last
regardless of the amounts involved. Magnitude of amounts is often disregarded when accounts
are arranged as to how they are shown in the general ledger.

Dadami Lilinis Laundry Shop

Statement of Owners’ Equity
For the month ended March 31, 2019

M. Bahin, Capital, Mar 1, 2019 P 0.00

Add: Investment P 100,000.00
Net Income 19,000.00 119,000.00
Total P 119,000.00
Less: Withdrawals 3,000.00
M. Bahin, Capital, Mar. 31, 2019 P 116,000.00

The Statement of Owner’s Equity shown above has no beginning capital because it is a
newly opened business. Previously-opened companies will have beginning balances forwarded
from the ending balance of the preceding period.

Periodically, a business reports details about its assets, liabilities and capital. The
balances of the accounts comprising the financial position at the end of the accounting period
could be found on the last line of the accounting equation. A Statement of Financial Position for
the business will show:

Dadami Lilinis Laundry Shop

Statement of Financial Position
March 31, 2019

Assets Liabilities
Cash P 51,000- Accounts Payable P 35,000-
Accounts Receivables 20,000-
Laundry Supplies 20,000- Owner's Equity
Laundry Equipment 60,000- Maila Bahin, Capital 116,000-
Total Liabilities and
Total Assets P 151,000 Owner's Equity P 151,000-

The Statement of Financial Position (Balance Sheet) shown above is in the account form.
Take note that the total assets should be shown in the same line as with the total liabilities and
capital when using this format. Another format, the report form, shows the liabilities and capital
sections below the asset section.

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Module 2 – Analysis of Business Transactions

THE STATEMENT OF CASH FLOWS

Another basic type of financial statements is the cash flow statement. The cash flow
statement involves three types of business activities such as: operating activities, investing
activities, and financing activities.

A Statement of Cash Flows shows the proper presentation of the three types of business
activities; operating, investing and financing activities during the month. Each category of cash
flow activity includes both cash receipts (positive amounts) and cash payments (negative
amounts) which is indicated by parenthesis.

Generally, cash inflows or receipts increase the amount of cash balance, whereas, cash
outflows or disbursements decrease the amount of cash as of the balance sheet date.

The Statement of cash flows of Dadami Lilinis Laundry Shop is as follows:

Dadami Lilinis Laundry Shop

Statement of Cash Flows
For the month ended March 31, 2019

Cash flows from operating activities:

Cash received from cash customers P 15,000.00
Cash paid for accounts payable (30,000.00)
Cash paid for expenses (see schedule) (11,000.00)
Cash paid for supplies (20,000.00)
Net Cash provided by operating activities (P 46,000.00)
Cash flows from investing activities:
Cash paid for equipment -
Cash flows from financing activities:
Cash investment by the owner P 100,000.00
Cash withdrawal by the owner (3,000.00)
Net Cash provided by financing activities 97,000.00
Increase in Cash P 51,000.00
Cash Balance, March 1, 2019 -0-
Cash Balance, March 31, 2019 P 51,000.00

The ending balance in the Statement of Cash Flows should have the same amount as the
Cash balance shown in the general ledger and the Statement of Financial Position.

Schedule 1 – Payment for expenses:

Rent Expense P 8,000

Salaries Expense 3,000
Total P 11,000

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Module 2 – Analysis of Business Transactions

As disclosed in the statement of cash flows, operating activities involve the production or
purchase of merchandise and the sale of goods or services to customers. Operating activities
also include the expenditures related in administering the business. Operating activities generally
relate to the calculation of net income.

Transactions that involve making and collecting loans or that involve purchasing and
selling plant assets, other productive assets, and investments are called investing activities.
Usually, investing activities involve the purchase or sale of assets that are classified on the
balance sheet as plant and equipment, intangible assets or long-term investments. However, the
purchase and sale of short-term investments other than cash equivalents are also investing
activities. If a company loans money to other parties, the cash receipts from collecting the loans
are classified as investing activities. However, collections of interest are not investing activities;
they are reported as operating activities.

A company’s transactions with its owner/s and long-term creditors are typically called
financing activities. Financing activities also include borrowing of cash on a short-term basis.
However, cash payments to settle credit purchase of merchandise, whether on account or by
note, are operating activities. Payments of interest expense are also operating activities.

The following shows examples of these three activities:

Cash flows from operating activities:

Cash Inflows Cash Outflows

Cash sales to customers.
Cash collections from credit customers.
Receipts of cash dividend from stock investment.
Receipts of interest payments.
Refunds from suppliers.
Cash collected from a lawsuit.
Payment to employees for salaries and wages.
Payments to suppliers of goods and services.
Payments to government agencies for taxes, fines
and penalties.
Interest payments, net of amounts capitalized.
Contributions to charities.
Cash refunds to customers.

Cash flows from investing activities:

Cash Inflows Cash Outflows

Proceeds from selling of productive assets (e.g.,
land, building).
Proceeds from the sale (discounting) of loans
made by the enterprise.
Proceeds from collecting the principal amount of
loans.
Proceeds from selling the investments in equity
securities of other companies.
Proceeds from selling investments in the debt
securities of other entities, except cash
equivalents.
Payments to purchase property, plant and
equipment or other productive assets (excluding
merchandise inventory).
Payments in the form of loans made to other
parties.
Payments to acquire entity securities of other
companies.
Payments to acquire debt securities of other
entities except cash equivalents.
Payments in the form of loans made to other
parties.

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Module 2 – Analysis of Business Transactions

Cash flows from financing activities:

Cash Inflows Cash Outflows

Proceeds from the issuance of equity securities
(e.g., ordinary and preference shares).
Proceeds from the issuance of bonds and notes
payable.
Proceeds from other short or long term borrowing
transactions.
Payments of dividends and other distribution to
owners.
Payments to purchase treasury stocks.
Repayments of cash loans.
Payments of the principal amounts involve in
long-term credit arrangements.

Summary of How Transactions Affect the Accounting Equation

The following basic rules relate to how transactions affect the accounting equation:

1. Each transaction changes at least two or maybe more accounts in the accounting equation.

2. When a transaction increases one side of the equation, the other side of the equation must
also increase by the same amount.

Assets = Liabilities + Capital

a. + +
b. + +

3. When a transaction equation must also decrease one side of the equation, the other side of
the equation decrease by the same amount.

Assets = Liabilities + Capital

a. - -
b. - -

4. When all the changes occur on one side of the equation, increases on that side of the equation
must be equally matched by decreases in another item on the same side.

Assets = Liabilities + Capital

a. +/-
b. + -
c. - +

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Module 2 – Analysis of Business Transactions

The accounts affected or involved and the effects of the transaction on the said accounts are
illustrated as follows:

1. Ms. Maila Bahin started her own business by investing P 800,000 cash.

Analysis of the above transaction:

Accounts affected Effect

Cash - Increase
Maila Bahin, Capital - Increase

The business received cash so the account cash will increase. The amount received by the
business represent investment by the owner, so the other account affected is Maila Bahin,
Capital which will also increase.

Note: Transactions are to be analyzed from the point of view of the business.

2. Purchased for cash office supplies worth P 5,000.

Office Supplies - Increase

Cash - Decrease

Since office supplies were purchased by the firm, its office supplies will increase. The payment
of cash will have an effect of decreasing cash.

3. Returned office supplies because of defects receiving a cash refund.

Office Supplies - Decrease

Cash - Decrease

The return of office supplies will result to decrease in the office supplies of the company. The
cash refund received will increase the account cash.

4. Purchased office equipment on account.

Office Equipment - Increase

Accounts Payable - Increase

The purchase of office equipment will have an effect of increasing the account office
equipment. Since the office equipment was purchased on account (on credit), the liability
account, Accounts Payable will also increase.

5. Issued check in payment for the office equipment previously purchased on account.

Accounts Payable - Decrease

Cash - Decrease

6. Paid office rental for the month.

Rent Expense - Increase

Cash - Decrease

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Module 2 – Analysis of Business Transactions

The payment was for office rental, so it is to be charged to the account Rent Expense. Every
time an expense is paid the particular expense account increases while the account cash
decreases.

7. Ms. Maila Bahin, the owner withdrew cash from the business for his personal use.

Maila Bahin, Drawing - Increase

Cash - Decrease

8. Received cash payments from clients for services rendered to them by the business.

Cash - Increase
Service Revenue - Increase

A service business earned its revenue/income from rendering services to customers or clients.
Once services have been rendered whether for cash or on account, revenue is considered
earned or realized. Thus, revenue increases.

9. Rendered services to clients on account.

Accounts Receivable - Increase

Service Revenue - Increase

The company will have a receivable from the clients to whom services were rendered on
account. Hence, the Accounts Receivable of the company will increase.

10. Collected a receivable from a client.

Cash - Increase
Accounts Receivable - Decrease

Since cash is received by the company cash will increase. The collection of receivable
decreases the company’s receivable account.

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Module 2 – Analysis of Business Transactions

The analysis of business transactions are summarized as follows:

Business transactions Accounts affected Effect

a. Receipt of cash investment from the owner. Cash Increase

Owner’s Capital Increase

b. Purchase of office supplies for cash. Office Supplies Increase

Cash Decrease

c. Return of defective office supplies Cash Increase

previously purchased for cash. Office Supplies Decrease

d. Purchased office equipment on account. Office Equipment Increase

Accounts Payable Increase

e. Payment for the equipment previously Accounts Payable Decrease

purchased on account. Cash Decrease

f. Cash receipts from the customers for Cash Increase

services rendered. Service Revenue Increase

g. Services rendered to customers on account. Accounts Receivable Increase

Service Revenue Increase

h. Cash receipts from customers on account. Cash Increase

Accounts Receivable Decrease

i. Payment of employee’s salaries Salaries Expense Increase

Cash Decrease

j. Withdrawals of cash from the business by Owner’s Drawing Increase

the owner. Cash Decrease

ANALYSIS OF BUSINESS TRANSACTIONS AS TO DEBIT AND CREDIT

What does account mean?

An account is a record in an accounting system that tracks the financial activities of the
business and categorized on the basis of the expanded accounting equation:

Assets = Liabilities + Owner’s Equity + Revenues – Expenses.

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These records increase and decrease as the business events occur throughout the
accounting period. Each individual account is stored in the general ledger and used to prepare
the financial statements at the end of an accounting period.

The T-Aaccount

A T-account is a very useful tool that is used for illustrations, analyzing transactions and
in problem solving. It is called T-account because it looks like big letter T. it appears as follows:

Title of the account

Debit Credit
(left side) (right side)

What is the difference between Debit and Credit?

The words debit and credit came from the Latin words debere (meaning “to owe”) and
credere (meaning “to trust or believe”). Debit is abbreviated as Dr. and credit as Cr. In accounting,
the increase or decrease in an account is being made by means of debit and credit.

When an account is debited, it does not mean that such account is increased, because
debit may increase or decrease the balance of an account. Likewise, when an account is credited
it does not mean that such account is decreased, because credit may also increase or decrease
the balance of an account.

To debit an account also mean to charge the account.

Rules of Debit and Credit

The account or accounts to be debited and credited can be determined easily by applying
the rules of debit and credit.

Example:

Assets are resources that the company can use to generate revenues in current and future
years. Asset accounts have a debit balance and are always presented on the balance sheet first.

Liabilities represent the debt obligations that the company owes to creditors. This can include
bank debt as well as notes from owners. Liability accounts have a credit balance and appear
below assets on the balance sheet.

Equity accounts represent the owner’s stake in the business. Equity is often called net assets
because it shows the amount of assets that the owners actually own after the creditors have been
paid off. You can calculate this by reversing the accounting equation around to solve for equity
instead of assets.

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Module 2 – Analysis of Business Transactions

Revenue and expense accounts are technically both temporary equity accounts, but they are
significant enough to mention separately. Revenue accounts track the income generated by the
business. These items have a credit balance and increase total equity.

Expense accounts, on the other hand, represent the resources used to generate income. These
items have a debit balance and lower total equity.

At the end of each accounting period, the revenue and expense accounts are closed to either
the income summary account, retained earnings account, or capital account depending on the
type of organization.

Generally, debit signifies increase in assets, expenses and drawing whereas, credit signifies
increase in liabilities, capital and revenues. On the other hand, debit signifies decrease in
liabilities, capital and revenues, whereas credit signifies decrease in assets, expenses, and
drawing.

Stated differently,

Debit signifies: Credit Signifies:

Increase in Assets Decrease in Assets
Decrease in Liabilities Increase in Liabilities
Decrease in Capital Increase in Capital
Increase in Drawing Decrease in Drawing
Decrease in Revenue Increase in Revenue
Increase in Expense Decrease in Expense

The application of the rules of debit and credit in determining the account or accounts to be
debited and credited are illustrated as follows:

Atty. Alex Flores, decided to start his practice of law by establishing his own law office.
Following are the transactions of the law firm during June of the current year, its first month of
operation:

June 1 – Cash of P 200,000 was received from Atty. Flores, the owner as his initial investment in
his law firm.
Debit - Cash
Credit - Alex Flores, Capital

The receipt of cash by the company will increase its asset cash, therefore, cash is to be
debited. Alex Flores, Capital is to be credited to record the increase in the capital account
of the business.
2 – Purchase office supplies for cash, P 5,000.
Debit - Office Supplies
Credit - Cash

The purchase of office supplies will increase the asset office supplies, so it is to be
debited. Cash is to be credited because the payment will cause cash to decrease.

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Module 2 – Analysis of Business Transactions

3 – Purchase office equipment worth P 50,000. Paid P 10,000 cash as down payment and
signed a promissory note for the balance.
Debit - Office Equipment
Credit - Cash and Notes Payable

The asset office equipment will increase so it has to be debited. The office equipment
was not paid in full so the company will have a liability for the unpaid balance. Since the
liability is supported by a promissory note, the account to be credited is Notes Payable.
Cash is also to be credited because the down payment will cause cash to decrease.
4 – Issued check in payment for the promissory note issued, P 40,000.
Debit - Notes Payable
Credit - Cash

The asset office equipment will increase so it has to be debited. The office equipment
was not paid in full so the company will have a liability for the unpaid balance. Since the
liability is supported by a promissory note, the account to be credited is Notes Payable.
Cash is also to be credited because the down payment will cause cash to decrease.
5 – Received P 50,000 cash from clients for services rendered for cash.
Debit - Cash
Credit - Professional Fees

The receipt of cash by the business is always recorded by debiting the account cash,
whereas, the earning of revenue is always recorded by crediting the revenue account.
6 – Billed a client for services rendered on account, P 30,000.
Debit - Accounts Receivable
Credit - Professional Fees

The company will have a receivable from the client to whom services were rendered on
account. Therefore, Accounts Receivable is to be debited. Again, for a service business,
revenue is considered earned or realized once services have been rendered whether for
cash or on account. That’s why, the revenue account Professional Fees is to be credited.
7 – Received payment from the client to whom services were previously rendered on
account.
Debit - Cash
Credit - Accounts Receivable

The collection of a receivable will decrease the receivable account, so it is to be credited.

8 – The owner withdrew P 10,000 cash from the business for personal use.
Debit - Alex Flores, Drawing
Credit - Cash

Cash taken by the owner for personal use is to be charged to the owner’s drawing
account.
9 – Paid office rent for the month, P 8,000.
Debit - Rent Expense
Credit - Cash

The payment for rental will increase the balance of the Rent Expense account, so it is to
be debited

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Module 2 – Analysis of Business Transactions

The application of the rules of debit and credit are summarized as follows:

Business Transactions Debit Credit

a. The owner invests cash in the business Cash Owner’s Capital
b. The owner withdrew cash from the Owner’s Drawing Cash
business for personal use.
c. Purchased office supplies for cash. Office Supplies Cash
d. Bought office supplies on account. Office Supplies Accounts Payable
e. Returned some office supplies previously Accounts Payable Office Supplies
purchased on account.
f. Purchased equipment on account. Equipment Accounts Payable
g. Issued check in payment for the equipment Accounts Payable Cash
purchased on account.
h. Received cash from customers for Cash Service Revenue
services rendered.
i. Rendered services to customers on Accounts Receivable Service Revenue
account.
j. Received payment from customers on Cash Accounts Receivable
account.
k. Paid employees’ salaries. Salaries Expense Cash

The following additional suggestions are given for easier understanding of the debit and credit
entries:

1. If there are only two accounts affected in the transaction, one is to be debited and the
other one is to be credited. The two accounts cannot be both debited or credited.
2. Apply the concept of value received and value given away.

In the transaction, purchased office supplies for cash, the value received is Office
Supplies, so it is the account to be debited. The value given away is Cash, so it is the
account to be credited.

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Discussion Questions

1. What are business transactions?

2. External transactions? Internal transactions?
3. Give examples of external transactions.
4. What is the importance of source documents?
5. Give examples of source documents.
6. What is double-entry accounting?
7. What is the basic accounting equation?
8. What is meant by equities?
9. Explain the two types of equities.
10. How is the accounting equation affected by business transactions?
11. What are the rules of debit and credit?

Exercises for Understanding

1. Gawa Agad Repair Shop had been in operation for two years. Balances of the accounts
as of July 1, 2019 are shown in the form provided. The following transactions were
completed by Gawa Agad Repair Shop for the month of July.

Date Transactions
2019 Mr. Aldwin Gawa invested additional cash P 50,000- and
July 3 equipment valued at P10,000- in his business.
8 Borrowed money from Banco de Oro for P 200,000- issuing
four non-interest-bearing note of P 50,000- each payable at
the end of month beginning July 31.
10 Bought additional equipment for P 100,000- paying
P50,000- cash and the balance on account.
12 Rendered services to a customer on account for P25,000.
13 Bought supplies for cash for use in the shop PI 5,000-
15 Paid the salaries of shop employees P 12,000-
16 Returned P2,000- defective supplies bought on July 13.
20 Collected 50% of the customer's account (refer to July 12
transaction)
24 The owner withdraws cash for personal use PI 5,000-.
25 Rendered services for cash PI 0,000-
31 Supplies used for the month P 5,500-.
31 Paid the note due today.

Instructions:

a. For each transaction above, state in column A the accounts affected of the value received
and value given away. In column B, the account classification of the value received and
value given away as to Asset, Liability and Capital and in column C, the effect on the

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Module 2 – Analysis of Business Transactions

account of the value received and value given away if it is an increase or decrease. The
first transaction has been done for you.
b. Record the transactions and the balances after each transaction using the tabular form
provided.
c. Prepare the following financial statements
1. Income Statement
2. Statement of Owners’ Equity
3. Statement of Financial Position
4. Statement of Cash Flows

a. Effect on the accounting equation (write increase or decrease)

Column A Column B Column C

Effect
Account Affected Account Classification (Increse/Decrease)
Date Value Value Value
Value Given Value Given Value Given
Received Away Received Away Received Away
2019
July 3
8
10
12
13
15
16
20
24
25
31
31

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Module 2 – Analysis of Business Transactions

b. Analysis of Transactions using accounting equation in tabular form.

Accounts Shop Accounts Notes Aldwin Gawa, Notations

Date Cash Receivable Supplies Equipment Payable Payable Capital

2. Answer the following questions by using the accounting equation:

2.1 The liabilities and owners’ equity of Greenmeadows Repair Service amount to
P5,450,000 and P3,150,000 respectively. How much is the company’s assets?

2.2 The liabilities of Althea’s Bake and Pastries House are equal to one-third of the total
assets. The owners’ equity is P2,400,000. What is the amount of liabilities?

2.3 At the beginning of the year, Maerksland Realty’s assets is P10,000,000 and owners’
equity is P4,000,000. During the year, assets increased by P2,500,000, while
liabilities decreased by P450,000. How much is the owners’ equity at the end of the
year?

2.4 The owners’ equity of Sushi Drugstore is P600,000, and the liabilities is P357, 500.
What is the company’s assets?

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2.5 At the end of the year 2019, PLDT company has total assets of P10, 500,000 and total
liabilities of P2,250,000. During the year 2019, assets increased by P850,000 while
liabilities increased by P500,000. What is the amount of Capital at the beginning of
2019?

3. For each of the following transactions, indicate the account/s to be debited and credited.

Business transactions Debit Credit

a. Issued check in payment for the
promissory note issued.
b. The owner transferred her personal
computer (equipment) for office use.
c. Purchased additional office supplies
on account.
d. Returned portion of office supplies
purchase in letter c.
e. Bought office supplies for cash.
f. Billed clients for services rendered
on account.
g. Received cash for services
rendered.
h. Paid cash for advertising the initial
opening of the business.
i. Received cash investment from
Rizzandrea Madrigal, the owner of
Salon Deluxe.
j. Received a check from a customer
on account.
k. Paid office rent for the month.
l. Paid creditors on account.
m. Purchased Shop equipment for
cash.
n. Borrowed money from the bank
issuing a promissory note.
o. Paid the salaries and wages of
employees.

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