FINANCIAL ACCOUNTING AND REPORTING

LEARNING MODULES

Lesson 4 ANALYZING TRANSACTIONS

Did you know that?

LEARNING OBJECTIVE Certified Public Accountant Licensure Examination,
popularly known as CPALE, is conducted yearly during
1. Illustrate the debit and credit in each May and October. The examinee must have at least
transaction. 75% general average across six board subjects, in no
case that the rating of any subject is below 65%,
otherwise, the examinee becomes a conditional
examinee and needs to retake and pass the failed
subjects within two years to pass the entire
Accountable events are those that affect the examination.
elements of financial statements namely, assets,
liabilities, equity, income, and expenses. These
events are usually evidenced with supporting
documents such as sales invoices, official receipts, delivery receipts, etc. External events are transactions involving
the business and an external party while internal events are those that do not involve an external party. Let us
consider the following transactions if it is accountable events or not and if accountable, is it an external event or
an internal event.

Transactions Does it affect the elements of financial Should it be

statements (assets, liabilities, equity, recorded or
income, and expenses) not?
1. Received cash from clients for services rendered. Yes (assets, income) Yes
2. Paid suppliers the amount owed. Yes (assets, liabilities) Yes
3. Purchased supplies on account. Yes (assets, liabilities) Yes
4. Hired employees. No No
5. Paid electricity bill of the house. No No
6. Paid electricity of the business. Yes (assets, expenses) Yes
7. Collected cash from clients on account. Yes (assets, assets) Yes
8. Withdrew cash from the business. Yes (assets, equity) Yes
9. Billed clients for services rendered. Yes (assets, income) Yes
10. Paid advertising expenses. Yes (assets, expenses) Yes

Let us apply those transactions in the expanded accounting equation to explore its effects on the elements.

Transactions Assets = Liabilities + Equity + Income - Expenses

1. Received cash from clients for Increase = Increase
services rendered.
2. Paid suppliers the amount owed. Decrease = Decrease
3. Purchased supplies on credit. Increase = Increase
4. Hired employees. No effect
5. Paid electricity bill of the house. No effect
6. Paid electricity of the business. Decrease = Increase
7. Collected cash from clients on Increase =
credit. Decrease
8. Withdrew cash from the business. Decrease = Decrease
9. Billed clients for services Increase = Increase
rendered.
10. Paid advertising expenses. Decrease = Increase

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LEARNING MODULES

Let us apply the concept of debit and credit in the transaction analysis. In simple language, debit means the value
of the things received while credit refers to the value of the things parted with. Debit refers to inflows and credit
refers to outflows. Applying the separate entity concept, debit means all the values received by the business and
credit means all the values parted by the business. The debit indicates the left side of an account, and credit
indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. When comparing the
totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An
account shows a credit balance if the credit amounts exceed the debits. Normally, assets and expenses have debit
balances while liabilities, equity, and income have credit balances.

Let us take the below illustration as a tool in recording the debit and the credit for every transaction. Using the
previous transactions, let us make use of the elements affected by the transactions instead of the correct account
titles and provide some hypothetical amounts.

DEBIT CREDIT
Accounts Amount Accounts Amount
1. 1Asset 20,000 1. 1Income 20,000
2. 2Liability 10,000 2. 2Asset 10,000
3. 3Asset 2,000 3. 3Liability 2,000
4. No effect - 4. No effect -
5. No effect - 5. No effect -
6. Expense 1,000 6. Asset 1,000
7. Asset 5,000 7. Asset 5,000
8. Equity 3,000 8. Asset 3,000
9. Asset 10,000 9. Income 10,000
10. Expense 1,000 10. Asset 1,000
This time, let us consider the following transactions in applying the debit and credit sides of a transaction.

MSS Internet Café is engaged in internet services and computer rentals for various clients. The following
account titles are used in the business.
Assets Liabilities Income
Cash Accounts Payable Service Revenue
Accounts Receivable Equity Expenses
Prepaid Supplies MSS, Capital Electricity Expenses
ICT Equipment MSS, Drawings Rent Expenses
The following transactions occurred during September 2020.
September 1 Invested cash in the business amounting to P100,000.
September 3 Purchased computers and printers for the business for P60,000 in cash.
September 6 Paid rent, P2,000.
September 10 Received cash from clients for services rendered, P2,000.
September 17 Billed clients for services rendered, P5,000.
September 19 Purchased supplies on account, P1,000. The concept of duality in
September 22 Paid the supplies owed, P1,000. accounting suggests that for
September 25 Paid electricity, P 1,000. every debit, there is a
September 28 Collected cash from clients on account, P5,000 corresponding credit while the
September 30 Withdrew cash from the business, P2,000. concept of equality suggests
that the value of the debit must
equal the value of the credit.
Let us make a debit and credit analysis for each transaction.

DEBIT CREDIT
Explanation
Accounts Amount Accounts Amount
1 Cash 100,000 1 MSS, Capital 100,000 The business received cash from the
owner representing his initial capital.
3 ICT 60,000 3 Cash 60,000 The business received equipment and
Equipment parted cash in exchange.
6 Rent 2,000 6 Cash 2,000 The business used the building through
Expenses rent and parted cash in exchange.

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LEARNING MODULES

10 Cash 2,000 10 Service 2,000 The business received cash in exchange

Revenue for the services.
17 Accounts 5,000 17 Service 5,000 The business received the right to collect
Receivable Revenue from the client for the rendered services.
19 Prepaid 1,000 19 Accounts 1,000 The business received supplies in
Supplies Payable exchange for a promise to pay.
22 Accounts 1,000 22 Cash 1,000 The business paid the payable in
Payable exchange for cash.
25 Electricity 1,000 25 Cash 1,000 The business used electricity and paid
Expenses cash in exchange.
28 Cash 5,000 28 Accounts 5,000 The business received cash in exchange
Receivable for collectibles.
30 MSS, 2,000 30 Cash 2,000 The business gave cash to the owner
Drawings withdrawing his investment.

Suggested Exercises

1. Problems 1-6, Financial Accounting & Reporting (Fundamentals) 2nd Edition (2019) by Millan, pp.
204-209.
2. Problems 1-21, Basic Financial Accounting and Reporting 22nd Edition (2019) by Ballada & Ballada,
pp. 2-38 to 2-58.

References

1. Ballada, W. & Ballada, S. (2019). Basic Financial Accounting and Reporting 22nd Edition. Manila,
Philippines: DomDane Publishers.
2. Millan, Z. V. (2019). Financial Accounting & Reporting (Fundamentals) 2nd Edition. Baguio City,
Philippines: Bandolin Enterprise.
3. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting Principles 13th Edition. Asia: John
Wiley & Sons (Asia) Pte Ltd.