ACCOUNTING FUNDAMENTALS

T h e Accounting Equation and the D o u ble -E ntry System

The starting point in the accounting process is an analysis of the transactions of a

business. A business transaction is any financial event that changes the resources of a
firm. For example, purchases, sales, payments and receipt of cash are all business
transactions. The accountant must look at the effects of each business transaction to
decide what information to record and where to record it. Thus, the study of
accounting begins with an investigation into how the accountant analyzes business
transactions.

A CCO U N TIN G E V E N TS A N D TR A N S A C TIO N S

Ami accounting event is an economic occurrence that causes changes in an enterprise's

assets, liabilities, and/or equity. Events may be internal actions, such as the use of
equipment for the production of goods or services. It can also be an external event,
such as the purchase of raw materials from a supplier.

A transaction is a particular kind of event that involves the transfer of something of

value between two entities. Examples of transactions include acquiring assets from
owner(s), borrowing funds from creditors, and purchasing or selling goods and services.

A CCO U N TIN G IN F O R M A T IO N SYSTEM jj

Every business organization must*have an accounting information system which will
generate reliable financial information needed by the decision-makers in a timely
manner. The design and operation of a system must consider the anticipated users of
the information and the types of decisions they are expected to make. The design of
the system to meet the entity's information requirement depends on the firm's size,
nature of operations, volume of transaction data, organizational structure, form of
business and extent of government regulation. These will influence the way in which
information is accumulated and reported in the financial statements.

An accounting information system is' the combination of personnel, records and

procedures that a business uses to meet its need for financial information. Most firms
have an accounting m anual that specifies the policies and procedures to be followed in
accumulating information within the accounting information system. This manual

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 details w h a t events are to be recorded in the accounts, and when and how the if
information is to be classified and accumulated. An effective accounting information ^
system should achieve the following objectives:

• To process the information efficiently at the least cost (cost-benefit principle).

• To protect entity's assets, to ensure that data are reliable, and to minimize
wastes and the possibility of theft or fraud (control principle).
• To be in harmony with the entity's organizational and human factors
(compatibility principle).
• To be able to accommodate growth in the volume of transactions and for
organizational changes (flexibility principle).

The above diagram illustrates how economic activities flow into the accounting process,
which produces accounting information. This information is then used by decision
makers in making economic decisions and taking specific actions* thus, resulting in
economic activities. Th e cycle goes on.

E L E M E N T S O F F IN A N C IA L S T A T E M E N T S

Financial Position

At regular intervals the business will review the status of the firm 's assets, liabilities, and
ow ner's equity in a formal report called a balance sheet, which is prepared to show the
firm 's financial position on a given date.

Asset is a resource controlled by the enterprise as a result of past events and from
w hich future economic benefits are expected to flow to the enterprise. In simple.terms,
assets are valuable resources owned by the entity. Assets include cash, cash
equivalents, notes receivable, accounts receivable, inventories, prepaid expenses,
property, plant and equipment, investments, intangible assets and other assets.

Liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits. A plain definition would be— liabilities are obligations of
the entity to outside parties who have furnished resources. Liabilities include notes
payable, accounts payable, accrued liabilities, unearned revenues, mortgage payable,
bonds payable and other debts of the enterprise.

Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities. Equity may pertain to any of the following depending on the form of business
organization:

♦ In a sole proprietorship, there is only one owner's equity account because there
is only one owner.

♦ In a partnership, an owner's equity account exists for each partner.

♦ In a corporation, owners' equity, or shareholders' or stockholders' equity,

consists of share capital or capital stock, retained earnings and reserves
representing appropriations of retained earnings among others.

Performance

If there is an excess of revenue over expenses, the excess represents a profit. Making a
profit is the reason that people risk their money by investing it in a business. A firm's
accounting records show not only increases and decreases in assets, liabilities, and
owner's equity but the detailed results of all transactions involving revenue and
expenses.

Income is increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants.

The definition of income encompasses both revenue and gains. Revenue arises in the
course of the ordinary activities of an enterprise and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties, and rent.

Gains represent other items that meet the definition of income and may, or may not,
arise in the course of the ordinary activities of an enterprise. Gains represent increases
in economic benefits and as such are no different in nature from revenue. Hence, they
are not regarded as constituting a separate element.
Expenses are decreases in economic benefits during the accounting period in the
of outflows or depletions of assets or incurrences of liabilities that result in decreases^,
equity, other than those relating to distributions to equity participants.

The definition of expenses encompasses losses as well as those expenses that arise
the course of the ordinary activities of the enterprise. Th e re are various classes of
expenses but they are generally classified as cost of services rendered o r cost of good$
sold, distribution costs or selling expenses, administrative expenses o r other operating
expenses.

Losses represent other items that meet the definition of expense and m ay or may not,
arise in the course of the ordinary activities of an enterprise. Losses represent
decreases in economic benefits and as such are no different in nature from other
expenses. Hence, they are not regarded as a separate elem ent.

T Y P IC A L A C C O U N T T IT L E S U S ED

BALANCE SHEET

Accountants use special accounting terms when they refer to p ro p e rty and financial
interests. For example, they refer to property that a business o w ns as the business's
assets and to the debts or obligations of the business as its liabilities. The owner's
financial interest is called owner's equity; sometimes it is called proprietorship or net
w o rth . O w n e r's equity is the preferred term and is the term used th ro u g h o u t this book. |

Assets

Assets should be classified only into two: current assets and n o n -cu rre n t assets. An
entity shall classify an asset as current when:

a. it expects to realize the asset, or intends to sell or consum e it, in its normal i
operating cycle;
b. it holds the asset primarily for the purpose of trading;
c. it expects to realize the asset within twelve m onths after the end of the
reporting period; or
d. the asset is cash or a cash equivalent unless it is restricted from being L
exchanged o r used to settle a liability for at least tw elve m onths a f t e r the
end of the reporting period.

the 9
An entity shall classify all other assets as non-current. Operating cycle is ^
betw een the acquisition of materials entering into a process and Its realization m
an instrum ent that is readily convertible to cash.
 Current Assets

Cash. Cash is any m edium of exchange that a bank will accept for deposit at face value.
It includes coins, currency, checks, money orders, bank deposits and drafts.

/ C a s h Equivalents. These 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.

Notes Receivable. A note receivable is a written pledge that the custom er will pay the
business a fixed am ount of money on a certain date.

Accounts Receivable. These are claims against customers arising from sale of services
or goods on credit. This type of receivable offers less security than a promissory note.

Inventories. These are assets which are (a) held for sale in the ordinary course of
business; (b) in the process of production for such sale; or (c) in the form of materials or
supplies to be consumed in the production process or in the rendering of services.

Prepaid Expenses. These are expenses paid for by the business in advance. It is an
asset because the business avoids having to pay cash in the future for a specific
expense. These include insurance and rent. These prepaid items represent future
economic benefits— assets— until the time these start to contribute to the earning
process; these, then, become expenses.

Non-current Assets

Property, Plant and Equipment. These are tangible assets that are held by an
n enterprise for use in the production or supply of goods or services, or for rental to
others, or for administrative purposes and which are expected to be usecf during more
than one period. Included are such items as land, building, machinery and equipment,
furniture and fixtures, motor vehicles and equipment.

Accumulated Depreciation. It is a contra account that contains the sum of the periodic -
depreciation charges. The balance in this account is deducted from the cost of the
related asset— equipment or buildings— to obtain book value.

Intangible Assets. These are identifiable, nonmonetary assets without physical

substance held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes. These include goodwill, patents, copyrights,
licenses, franchises, trademarks, brand names, secret processes, subscription lists and
irne non-competition agreements,
hor

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 Liabilities

A n entity shall classify a liability as cu rre n t w h e n :

a. it expects to settle th e liability in its n o rm a l o p e ra tin g cycle;

b. it holds the liability p rim a rily fo r th e p u rp o s e o f tra d in g ;
c. the liability is due to be settled w ith in tw e lv e m o n th s a fte r th e en d o f th e
reporting period; o r
d. the entity does n o t have an u n co n d itio n a l righ t to d e fe r s e ttle m e n t o f the
liability fo r at least tw e lv e m o n th s a fte r th e e n d o f th e re p o rtin g p e rio d .

An entity shall classify all o th e r liabilities as n o n -c u rre n t.

C u rre n t Liabilities

A cc o u n ts P a y a b le . Th is a cc o u n t rep rese nts th e re ve rse re la tio n sh ip o f th e accounts

receivable. By a cce p tin g th e g o o d s o r services, th e b u y e r agre es to p a y fo r t h e m in the
near fu tu re .

N o te s P a y a b le . A n o te paya ble is like a note receivable b u t in a re v e rs e sense. In the

case o f a n o te p a ya b le , th e business e n tity is the m a k e r o f th e n o te ; th a t is, th e business
e n tity is th e p a rty w h o p rom ise s to pay the o th e r p a rty a specified a m o u n t o f m o n e y on
a specified fu tu re da te .

A c c ru e d L ia b ilitie s . A m o u n ts o w e d to o th e rs fo r u np a id e x p e n se s. T h is accou nt
includes salaries p a ya b le , utilities payable, interest payable and taxes p a y a b le .

U n e a rn e d R e v e n u e s . W h e n th e business e n tity receives p a y m e n t b e fo re p ro v id in g its

c u s to m e rs w ith g o o d s o r services, th e a m o u n ts re ce ive d are re c o rd e d in th e u ne arned
re v e n u e a c c b u n t (lia b ility m e th o d ). W h e n th e go ods o r services are p ro v id e d to the
c u s to m e r, th e u n e a rn e d re v e n u e is re du ced and in co m e is re c o g n ize d .

C u rre n t P o rtio n o f L o n g -T e r m D e b t. T h e s e are p o rtio n s o f m o rtg a g e n o te s, b o n d s and

o th e r lo n g -te rm in d e b te d n e s s w h ich are to be paid w ith in o n e y e a r fro m th e balance
sheet d a te .

N o n -c u rre n t Liabilitie s

M o rtg a g e P a ya b le . T h is a cc o u n t records lo n g -te rm d e b t o f th e business entity for

w h ich the business e n tity has ple dge d ce rtain assets as se cu rity to th e c re d ito r. In the
eve nt th a t th e d e b t p a y m e n ts are n o t m a d e , th e c re d ito r can fore close o r cause the
m ortgage d asset to be sold to e n a ble th e e n tity to settle th e claim .

Bo nds P ayable. Business orga n iza tio n s often obta in substantial sum s o f m o n e y from
lenders to finance the acquisition o f e q u ip m e n t and o th e r n e e de d assets. T h e y obtain
these funds by issuing b o nds. T h e b o n d is a co n tra ct b e tw e e n th e issuer a nd th e lender
specifying th e te rm s o f re p a y m e n t and the interest to be ch a rged.
Owner's Equity

Capital. This account is used to record the original and additional investments of the
owner of the business entity. It is increased by the am ount of profit earned during the
year or is decreased by a loss. Cash o r other assets that the o w ner may w ithdraw from
the business ultimately reduce it. This account title bears the name of the owner.

Withdrawals. W hen the o w n e r of a business entity withdraws cash or other assets,

such are recorded in the draw ing or withdrawal account rather than directly reducing
the owner's equity account.

Income Sum m ary. It is a te m porary account used at the end of the accounting period to
close income and expenses. This account shows the profit or loss for the period before
closing to the capital account.

IN C O M E S TA TE M E N T

Income

Revenue, or income, is the inflow of money or other assets (including claims to money,
such as sale made on credit) that results from sales of goods or services or from the use
of money or property. Th e result of revenue is an increase in assets.

Service Income. Revenues earned by performing services for a customer o r client; for
example, accounting services by a CPA firm, laundry services by a laundry shop.

Sales. Revenues earned as a result of sale of merchandise; for example, sale of building
materials by a construction supplies firm.

Expenses

An expense involves the outflow of money, the use of other assets, or the incurring of a
liability. Expenses include the costs of any materials, labor, supplies, and services used in
an effort to produce revenue.

Cost of Sales. The cost incurred to purchase or to produce the products sold to
customers during the period; also called cost of goods sold.

Salaries or Wages Expense. Includes all payments as a result of an employer-employee

relationship such as salaries or wages, 13th month pay, cost of living allowances and
other related benefits.

Telecommunications, Electricity, Fuel and W ater Expenses. Expenses related to use of

telecommunications facilities, consumption of electricity, fuel and water.

Supplies Expense. Expense of using supplies (e.g. office supplies) in the conduct of daily
business.

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 Rent Expense. Expense for space, equipment or other asset rentals.

Insurance Expense. Portion of premiums paid on Insurance coverage (e.g. on motor

vehicle, health, life, fire, typhoon or flood) which has expired.

Depreciation Expense. The portion of the cost of a tangible asset (e.g. buildings and
equipment) allocated or charged as expense during an accounting period.

Uncollectible Accounts Expense. The amount of receivables estimated to be doubtful

of collection and charged as expense during an accounting period.

Interest Expense. An expense related to use of borrowed funds.

THE A CCO UN TIN G EQ U ATIO N

Financial statements tell us how a business is performing. They are the final products of
the accounting process. But how do we arrive at the items and amounts that make up
the financial statements? The most basic tool of accounting is the accounting equation.
This equation presents the resources controlled by the enterprise, the present
obligations of the enterprise and the residual interest in the assets. It states that assets
must always equal liabilities and owner's equity. The basic accounting model is:

Assets = Liabilities + Ow ner's Equity

Note that the assets are on the left side of the equation opposite the liabilities and
owner's equity. This explains why increases and decreases in assets are recorded in the
opposite m anner ("mirror image") as liabilities and owner's equity are recorded. The
equation also explains why liabilities and owner's equity follow the same rules of debit
and credit.

The logic of debiting and crediting is related to the accounting equation. Transactions
may require additions to both sides (left and right sides), subtractions from both sides
(left and right sides), or an addition and subtraction on the same side (left or right side),
but in all cases the equality must be maintained.
Owner’s
Assets Liabilities Equity
a c c o u n t in g f o r b u s in e s s t r a n s a c t io n s

Accountants observe many events that they identify and measure in financial terms. A
business transaction is the occurrence of an event or a condition that affects financial
position and can be reliably recorded.

Financial Transaction W o rksh e e t

Every financial transaction can be analyzed or expressed in terms of its effects on the
accounting equation. The financial transactions will be analyzed by means of a financial
transaction worksheet which is a form used to analyze increases and decreases in the
assets, liabilities or owner's equity of a business entity.

Illustration. Del Mundo Accounting Services is a firm that provides a wide range of
bookkeeping and accounting services. This sole proprietorship business is owned by Dr.
Galicano Del Mundo, is also a CPA. The office is managed by Lalaine Mendoza, who has
a bachelor's degree in business administration. The firm is located in a large office
complex that has easy public access.

To simplify record keeping and billing, Del Mundo permits clients to charge accounting
services that are provided by the firm. He bills clients on a monthly basis for the services
they have received during the period. Customers who prefer may pay in cash
immediately after services are provided.

When a specific asset, liability or owner's equity item is created by a financial

transaction, it is listed in the financial transaction worksheet using the appropriate
accounts. Note that the date of the transaction is enclosed in parentheses. During
October 2010, the first month of operations, various financial transactions took place.
These transactions are described and analyzed as follows:

Initial Transactions

Starting a Business

Oct. 1 Galicano Del Mundo obtained the funds to start the business by withdrawing
P800,000 from his personal savings. He deposited the money in a new bank
account that he opened in the name of the firm, Del Mundo Accounting
Services.
Del Mundo Accounting Services
Financial Transaction Worksheet
Month of October 2010

Assets s Liabilities + Owner's Equity

Cash Del Mundo, Capital

 The financial transaction Is analyzed as follows:
♦ An entity separate and distinct from Del Mundo's personal financial affairs is
created.
♦ An economic resource— cash of P800,000 is invested in the business entity. The
source of this asset is the contribution made by the owner, which represents
owner's equity. The owner's equity account is Del Mundo, Capital.

♦ The dual nature of the transaction is that cash is invested and owner's equity
created. The effects of this transaction on the accounting equation are as
follows: increase in asset— cash from zero to P800,000 and increase in owner's
equity from zero to P800,000.

♦ At this point, the entity has no liabilities, and assets equal owner's equity.

Purchasing E qu ip m e nt on C redit

Oct. 3 Mendoza bought a computer, a copy machine, a fax machine, calculators and
other necessary equipment from Medina, Inc., at a cost of P100,000. Medina,
Inc., agreed to allow 60 days for the firm to pay the bill.

Assets Liabilities Owner's Equity

Cash Equipment Accounts Del Mundo,

Payable Capital , f
Bal. P800,000 P800,000
(3) ________ P100,000 P100,000
Bal. P800,000 + P100,000 P100,000 P800,000
P900/000 P900000

This arrangement is sometimes called buying on account. The business has a charge
account, or open-account credit, with its suppliers. Amounts that a business must pay in
the future under this agreement are known as accounts payable. The companies or
individuals to whom the amounts are owed are called creditors.

Purchasing Supplies for Cash

Oct. 5 Mendoza placed an order for toner, fax paper, bond,paper, CDs, pens, folders,
and other supplies that had a total cost of P20,000. The company that sold the
items, Batangas Supplies, Inc., requires cash payments from businesses that
are under six months old. Del Mundo Accounting Services therefore included
a check with its order.

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 Assets Liabilities + Owner's
Equity

Cash + Supplies Equipment s Accounts Del Mundo,

Payable Capital

Bal. P800,000 P100,000 W . P100,000 P800,000

(5) (20,000) P20,000 f
Bal. P780,000 + P20,000 + P100,000 = P100,000 P800,000
P9oo,ooo m f P900,000

This transaction did not change the total assets but it did change the composition of the
assets— it decreased one asset— cash and increased another asset— supplies by
P20,000. Note that the sums of the balances on both sides of the equation are equal.
This equality must always exist.

Paying a Creditor

Oct. 9 Mendoza decided to pay P40,000 to Medina, Inc., to reduce the firm's debt to
that business.

Assets Liabilities Owner's

Equity

Cash Supplies + Equipment = Accounts Del Mundo,

Payable Capital

Bal. P780,0Q0 P20000 P100,000 I I S P100,000. P800,000

P) (40,000) (40,000)
Ba|. P740,000 P20,000 + P100,000~~ = P60,000 P800,000
P860,000 = P860,000

This transaction is a payment on account. The effect on the accounting equation is a

- decrease in the asset— cash and a decrease in the liability— accounts payable. The
i payment of cash on account has no effect on the asset— supplies because the payment
r does not increase or decrease the supplies available to the business.

Effects of Revenue and Expenses

Shortly after Del Mundo opened his business on October 1 , 2010, some of the tenants in
5/ the office complex where the business is located became Del Mundo's first clients. Del
e Mundo also used his contacts in the community to gain other clients. Serviced to clients
it began a stream of revenue for the business.
d
However, keeping a business running costs money, and these expenses reduce owner's
equity. The expense figures are kept separate frpm the figures for the owner's capital
and revenue. The separate record of expenses is kept for the same reason as the
separate record of revenue is kept— to help analyze operations for the period.

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 Selling Services on Credit

Oct, 13 Oel Mundo Accounting Services earned P70,000 of revenue from charge
account clients. These clients are allowed 30 days to pay. ''5 »
I
A * L 1 OE 1
Cash * Accounts + Supplies + Equipment * Accounts + Dei Mundo, I
Receivable Payable Capital I
8^|. P740,000 P20,000 P100,000 = P60,000 P800,000 I
(13) ______________ P70,000 * ____________ _______70,000 I
8ai. P740,000 + £70,000 + P20/000 + PIOO.OOO = P60,000 4 P870,QQ(P
P930,ooo - P93o,ooo

The entity has performed services to clients so income should already be recognized.
Del Mundo is entitled to receive payment for these but the clients did not pay
immediately. Performing the services creates an economic resource, the clients'
promise to pay the amount which is called accounts receivable. This transaction
resulted to an increase in an asset— accounts receivable and an increase in owner's
equity of P70,000.

Employees' Salaries

Oct. 18 Del Mundo Accounting Services hired an accounting clerk on Oct. 1 to help in
the business. The firm paid P25,000 in salaries for this em ployee and Lalaine
Mendoza.

A OE
Cash Accounts Supplies Equipment Accounts Del Mundo,
Receivable Payable Capital

Bal. P740,000 P70,000 P20,000 P100,000 P60,000 P870,000

(18) (25,000) (25,POOL
Bal. P715,000 P70,000~ P20,000 P100,000"“ a P60,000 ' P845,000
P905,000 P905,000

This transaction resulted to a reduction in owner's equity as well as a reduction in cash.

By providing their services to Del Mundo for half-month, the employees have created
for the business an expense— salaries expense.

Collecting Receivables

3ct. 23 Del Mundo Accounting Services received P30,000 from clients who had
previously bought services on account. This cash was applied to their
accounts.

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 A L+ OE
Cash Accounts + Supplies + Equipment = Accounts 4 Del Mundo,
Receivable Payable Capital

Bal. P715,000 P70,000 P20,000 P100,000 % P60,000 P845,000

{23) 30,000 (30,000)
Bal. P745,000 P40,000 P20,000 P100,000 = P60,000 + P845,000
P905,000 = P905,000

Last Oct. 13, Del Mundo billed clients for services already rendered. On Oct 23, the
entity was able to collect P30,000 from them. The asset— cash is increased by P30,000.
The business should not record service income on May 20 since it has already recorded
the income last May 17. Total assets are unchanged. The business merely reduced one
asset— accounts receivable and increased another— cash.

Selling Services for Cash

Oct. 27 Del Mundo Accounting Services earned a total of P210,000 in revenue from
clients who paid cash for accounting and bookkeeping services.

OE
Cash 4 Accounts + Supplies 4 Equipment = Accounts 4 Del Mundo,
Receivable Payable Capital

Bal. P745,000 P40,000 P20,000 P100,000 = P60,000 P845,0Q0

(27) 210,000 • = 210,000
Bal. P955,000 4 P40,000 + P20,000 4 P100,000 = P60,000 4 P I, 055,000
P I,115,000 = P I,115,000

The entity earned service income by rendering accounting and bookkeeping services to
its clients. Del M undo rendered his professional services and collected revenues in cash.
The effect on the accounting equation is an increase in the asset— cash and an increase
in owner's equity. Income increases owner's equity. This transaction caused the
business to grow, as shown by the increase in total assets from P905,000 to P I,115,000.

Utilities Expense

Oct. 30 Del M undo Accounting Services received a P35,000 bill for the utilities that it
had used during the month. A check was issued to pay the bill immediately.

A L OE
Cash Accounts Supplies Equipment s Accounts Del Mundo,
Receivable Payable Capital

Bal. P955,000 P40,000 P20,000 P100,000 * P60,000 P1,055,000

(3°) (35,000) (35,000)
Bal. P920,000 P40,000 P20,000 P100,000 = t P60 000 PI,020,000
PI,080,000 * PI,080,000

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 Expenses are recorded when they are Incurred. Expenses can be paid in cash when they
occur/or they can be paid later. The payment for utilities is an expense for the month of
October. It represented an outflow of resources and a reduction of owner's equity.
Expenses have the opposite effect of income; they cause the business to shrink as
shown by the smaller amount of total assets of P1,080,000.

Rent Expense

Oct. 31 Del Mundo Accounting Services issued a check as payment for office rent for
October. The lease contract Del Mundo signed specified a m onthly rent of
P45,000.

A 3 L + OE
Cash + Accounts + Supplies + Equipment = Accounts + Del Mundo,
Receivable Payable Capital
Bal. P920,000 P40,000 P20,000 P100,000 = P60,000 P1,020,000
(31) (45,000) '= ■ (45,000)
Bal. P875,000 + P40,000 + P20,000 + P100,000 = P60,000 + P975,000
Pi,035,000 - PI,035,000

The rent expense of P45,000 is an expense for October. The treatment is similar to the
payment of utilities. Thus, as in the previous transaction, the payment for rent caused
the total assets to diminish.

Effect of Owner's Withdrawals

The owner of the business and the business are separate economic entities. If the
owner's personal transactions are mixed up with those of the business, it will be very
difficult to measure the performance of the firm.

Oct. 31 Galicano Del Mundo withdrew P150,000 in cash from the business to pay for
personal expenses.

A L + OE
Cash + Accounts + Supplies + Equipment * = Accounts + Del Mundo,
Receivable Payable Capital

Bal. P875,000 P40,000 P20,000 P100,000 * P60,000 P975,000 }

(31) (150,000) ____________ 1 = _ _ _ _ _ (150,0000
Bab P725,000 + P40,000 +■ P20,000 + P100,000 = P60,0Q0 + P825,00<LI
P885,000 = P885,000

On Oct. 1, Del Mundo invested P800,000; both cash and owner's equity increased. That
transaction was an investment by the owner and not an income-generating activity. Del
Mundo simply transferred funds from his personal account to.the business.

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 A cash withdrawal is exactly the opposite. Withdrawals are not 3 business expense but a
decrease of the owner's equity in the business. Withdrawal of cash or other assets for
personal use is the way by which the owner of the entity receives advance distribution
of the profits. The P150,000 cash withdrawal transaction resulted to a reduction in both
cash and owner's equity.

THE A C C O U N T

The accounting equation is a tool for analyzing the effects of business transactions. It
would be awkward, though, to record every transaction in the equation format if a
business had many transactions. Instead, separate written records cafled accounts are
kept. The account is the basic summary device of accounting. A separate account is
maintained for each element that appears in the balance sheet (assets, liabilities and
equity) and in the income statement (income and expenses). Thus, an account may be
defined as a detailed record of the increases^ decreases and balance of each element
that appears in an entity's financial statements. Accounts are kept so that financial
information can be analyzed, recorded, classified, summarized, and reported.

Use of T-Accounts

The simplest form of the account is known as the "T" account because of its similarity to
the letter "T". The account has three parts as shown below:

Account Title

Left side or Right side or

Debit side Credit side

DEBITS A N D C R E D ITS — T H E D O U B L E -E N T R Y S Y S TE M

Accounting is based on a double-entry system which means that the dual effects of a
business transaction is recorded. A debit side entry must have a corresponding credit
side entry. For every transaction, there must be one or more accounts debited and one
or more accounts credited. Each transaction affects at least two accounts. The total
debits for a transaction must always equal the total credits.

An account is debited when an amount is entered on the left side of the account and*
credited when an amount is entered on the right side. The abbreviations for debit and
credit are Dr. and Cr., respectively.

The account type determines how increases or decreases in it are recorded. Increases in
assets are recorded as debits (on the left side of the account) while decreases in assets
are recorded as credits (on the right side). Conversely, increases in liabilities and
owner's equity are recorded by credits and decreases are entered as debits.

3-15
The rules of debit and credit for Income and expense accounts are based on the
relationship of these accounts to owner's equity. Income increases ow ner's equity and
expense decreases owner's equity. Hence, increases in income are recorded as credits
and decreases as debits. Increases In expenses are recorded as debits and decreases as
credits. These are the rules o f debit and credit. The following sum marizes the rules:

Balance Sheet Accounts

Assets Liabilities and Owner's Equity

Debit Credit Debit Credit

(♦) (-> (-) W
Increases Decreases Decreases Increases

Income Statement Accounts

Debit for Credit for

decreases in owner's equity increases in owner's equity

Expenses Income

Debit Credit Debit Credit

(♦) M H m
Increases Decreases Decreases Increases

Illustration. Using T-accounts, the rules of debit and credit will be applied to the Del
M undo Accounting Services illustration. Before being recorded, a transaction must be
analyzed to determine which accounts must be increased or decreased. A fter this has
been determined, the rules of debit and credit are applied to effect the appropriate
increases and decreases to the accounts.

Oct. 1 Del M undo obtained the funds to start the business by w ithdraw ing P800,000
from his personal savings. He deposited the money in a new bank account
that he opened in the name of the firm, Del M undo Accounting Services.

Assets (Increase) » Owner's Equity (Increase)

Cash ___________ Del Mundo, Capital

Debit Credit Debit Credit

(+) (-) (-) (+)
10-1 800,000 10-1 800,000

This transaction increased both the asset— cash and ow ner's equity. According to the
rules of debit and credit, an increase in asset is recorded as debit while an increase in . A:
ow ner's equity is recorded as credit; thus, the entry is to debit cash and to credit D®! ||
M undo, Capital. The transaction dates are placed on the left side of the amounts % 1
reference.

3-16
 Oct. 3 Mendoza bought a com puter, a copy machine, a fax machine, calculators and
other necessary equipment from Medina, Inc., at a cost of P100,000. Medina,
Inc., agreed to allow 60 days for the firm to pay the bill.
Assets (Increase) = Liabilities (Increase)

Equipment v Accounts Payable _______ _

Debit Credit Debit Credit

H w (-) P
10-3 100,000 10-3 100,000

The asset— equipment is increased by a debit of P100,000 while the liability account—
accounts payable is increased by a credit for the same amount.

Oct. 5 Mendoza placed an order for toner, fax paper, bond paper, CDs, pens, folders,
and other supplies that had a total cost of P20,000. The company that sold the
items, Batangas Supplies, Inc., requires cash payments from businesses that
are under six months old. Del Mundo Accounting Services therefore included
a check with its order.

Assets (Decrease) = Assets (Increase)

Cash____________ . Supplies

Debit Credit Debit Credit

(+) (-) m <-)
10-1 800,000 10-5 20,000 10-5 20,000

This transaction increased the asset— supplies and decreased the asset— cash. Assets
are increased by debits and decreased by credits; thus, supplies is debited and cash is
credited for P20,000.

Oct. 9 Mendoza decided to pay P40,000 to Medina, Inc., to reduce the firm's debt to
that business.

Assets (Decrease) = Liabilities (Decrease)

Cash _____________ Accounts Payable

Debit Credit . Debit Credit

(+) (-) (-) (+)

10-1 800,000 10-5 20,000 10-9 40,000 10-3 100,000

10-9 40,000

Assets are decreased by credits while liabilities are decreased by debits. The transaction
is recorded by debiting accounts payable and crediting cash for P40,000 each.

3-17
 I 1 1 Mundo Accounting Services earned P70,000 of revenue from charge
account clients. These clients are allowed 30 days to pay.
Assets (Increase) » Owner's Equity (Increase)

Accounts
Credit Debit Credit
Debit
(-) | (-) m
H
10-13 70,000 10-13 70,000

Assets are increased by debits, income are increased by credits. Increases in income
increase owner's equity. A debit of P70,000 to accounts receivable and a credit of
P70,000 to the income account— fees revenues is needed.

Oct. 18 Del Mundo Accounting Services hired an accounting clerk on Oct. 1 to help in
the business. The firm paid P25,000 in salaries for this employee and Lalaine
Mendoza.

Assets (Decrease) Owner's Equity (Decrease)

Cash

Debit Credit Delpit Credit

(+) (-) (+) (-)
10-1 800,000 10-5 20,000 10-18 25,000
10-9 40,000
10-18 25,000

Expenses are increased by debits and assets are decreased by credits. Hence, salaries
expense is debited for P25,000 and cash credited f o r the same amount. Increases in
salaries expense decrease owner's equity.

Oct. 23 Del M undo Accounting Services received P30,000 from clients who had
previously bought services on account. This cash was applied to their
accounts.

Assets (Increase) Assets (Decrease)

Cash Accounts Receivable

Debit Credit Debit Credit

n M (+) (-)
10-1 800,000 10-5 20,000 10-13 70,000 10-23 30,000
10-23 30,000 10-9 40,000
10-18 25,000

Collections on account reduced the asset-accounts receivable but increased the

a s s e t-ca s h . Assets are increased by debits and decreased by credits; thus, a debit
cash for P30,000 and a credit to accounts receivable for P30.000 $ m

3-18
Oct. 27 Del Mundo Accounting Services earned a total of P210,000 in revenue from
clients who paid cash for accounting and bookkeeping services.

Assets (Increase) = Owner's Equity (Increase)

Cash Fees Revenues

D ebit. Credit Debit Credit

(+) (-) (-) (+)

10-1 800,000 10-5 20,000 10-13 70,000

10-23 30,000 10-9 40,000 10-27 210,000
10-27 210,000 10-18 25,000

The transaction increased the asset— cash and increased the income account— fees
revenues. Assets are increased by debits, income are increased by credits; hence, a
debit of P210,000 to cash and a credit of P210,000 to fees revenues is made. Increases
in income increase owner's equity.

Oct. 30 Del M undo Accounting Services received a P35,000 bill for the utilities that it
had used during the month. A check was issued to pay the bill immediately.

Assets (Decrease) = Owner's Equity (Decrease)

Cash _______________ Utilities Expense

Debit Credit Debit Credit

(+)■ (-) m (-)
10-1 800,000 10-5 20,000 10-30 35,000
10-23 30,000 10-9 40,000
10-27 210,000 10-18 25,000
10-30 35,000

Expenses are increased by debits and assets are decreased by credits; therefore, utilities
expense is debited and cash credited for P35,000. Increases in expenses decrease
owner's equity.

Oct. 31 Del M undo Accounting Services issued a check as payment for office rent for
October. The lease contract Del Mundo signed specified a monthly rent of
P45,000.

3-19
 Assets (Decrease) Owner's Equity (Decrease)

Rent Expense

Debit Credit Debit Credit

if us I m
(-)

10-1 800,000 10-5 20,000 10-31 45,000

10-23 30,000 10-9 40,000
10-27 210,000 10-18 25,000
10-30 35,000
10-31 45,000

As in utilities expense, the payment for office rent for October requires a debit to an
expense account and a credit to an asset account. Thus, rent expense is debited and
cash credited for P45,000. Owner's equity decreases when expenses increase.

Oct. 31 Galicano Del Mundo withdrew P150,000 in cash from the business to pay for
personal expenses.
Assets (Decrease) Owner's Equity (Decrease)

Cash

Debit Credit Debit Credit

(+) (-) (+) (-)
10-1 800,000 10-5 20,000 10-31 150,000
10-23 30,000 10-9 40,000
10-27 210,000 10-18 25,000
10-30 35,000
10-31 45,000
10-31 150,000

Withdrawals are reductions of owner's equity but are not expenses of the business
entity. A withdrawal is a personal transaction of the owner that is exactly the opposite
of an investment. This transaction increased the withdrawals account but reduced cash.
Debits record increases in the withdrawals account and credits record decreases in asset
accounts; thus, a debit to withdrawals and a credit to cash for P150,000 each is
necessary.
d is t in c t io n b e t w e e n r e c e ip t s a n d r e v e n u e

At this point, it will be useful to learn the distinction between receipts and revenue as
illustrated in the following table. The table shows various types of sales transactions
and classifies the effect of each on cash receipts and sales revenues for "this year":

This Year
Transaction Amount Cash. Sales
Receipts Revenue

1. Cash sales made this year. P20,000 P20,000 P20,000

2. Credit sales made last year; 30,000 30,000 0
cash received this year.
3. Credit sales made this year; 40,000 40,000 40,000
cash received this year.
4. Credit sales made this year; 10,000 0 10,000
cash to be received next year. r^
Total P90,p00 970,000

EFFECTS O F T R A N S A C T IO N S

It will be beneficial in the long-term to be able to understand a classification approach

that emphasizes the effects of accounting events rather than the recording procedures
involved.

Every accountable event has a dual but self-balancing effect on the accounting equation.
Recognizing these events will not in any manner affect the equality of the basic
accounting model. The nine types of effects of transactions are as follows:

1. Increase in Asset = Increase in Liability

2. Increase in Asset = Increase in Owner's Equity
3. Increase in one Asset = Decrease in another Asset
4. Decrease in Asset = Decrease in Liability
5. Decrease in Asset = Decrease in Owner's Equity f
6. Increase in Liability » Decrease in Owner's Equity
7. Increase in Owner's Equity = Decrease in Liability
8. Increase in one Liability = Decrease in another Liability
9. Increase in one Owner's Equity = Decrease in another Owner's Equity

3-21
 NAME:
PROFESSOR:
SECTION:

ATrue or False

I When a company receives a product previously ordered, a recordable event has

occurred.

2. Expenses represent the cash paid for goods sold or services rendered in the process
of generating revenue.

3. Unearned Revenues are classified as liabilities on the balance sheet.

4. The Land account and the Building account may be combined into one account.

5. Payment of a liability will not affect total assets but will cause total liabilities to
decrease.

6. Income statement accounts are also known as temporary accounts.

7. Office Supplies are classified as expenses.

8. A debit entry always decreases the balance of an account.

9. The T-account is sometimes called the book of original entry.

JO. /in a partnership, an owner's equity account exists for each partner.

1 1 . 1 a cash acquisition of a laptop computer will cause total assets to increase.

12. For a T-account, the account balance is the difference in total pesos between total I
debit footings and total credit footings.

13./ Income is increases in economic benefits during the accounting period that I
increases equity which may have resulted from the sale of goods or rendering of
services by the business.

14. Asset is a resource controlled by the enterprise as a result of past events and from |
which future Economic benefits are expected to flow to the enterprise.

15. Owner's equity is the excess of an entity's capital over its liabilities.

3-22
16. Not all financial transactions can be analyzed in terms of the basic accounting
model.

17 . For every transaction, thefe is at least one account affected.

18 Income increases owner's equity and is recorded by a debit.

19. An accounting information system is the combination of personnel, records and

procedures that a business uses to meet its need for financial information.

20. Wages Payable is a type of expense.

21. Owner's Withdrawals are classified as an expense.

22. Another word for expense is debt.

23. The basic summary device of accounting is the accounting equation.

24. Expenses cause decreases in owner's equity and are recorded by debits.

25. Accounts that appear on the left side of the accounting equation usually have credit
balances.
 NAME: PROFESSOR:
SECTION:

Multiple Choice

1. Which of the following is not subject to depreciation?

a. Equipment
b. Machinery
c. Building
d. Land

2. When the proprietor withdraws cash or other assets, the W ithdrawal account is

a. debited and credited.

b. credited.
c. debited.
d. not affected.

3. In the accounting equation, an increase in asset can be associated w ith

a. an increase in a liability.
b. an increase in a no ther asset.
c. a decrease in a liability.
d. a decrease in o w n e r's equity.

4. When an entity acquires com puter equipm ent for cash,

a. assets and ow ner's equity are increased.

b. an asset is increased and a liability is decreased.
c. one asset is increased while another is decreased.
d. one asset is increased and another is also increased.

5. Inventories are assets which are

a. in the form of materials or supplies to be consumed in the production process

or in the rendering of services.

b. held for sale in the ordinary course of business.

c. in the process of production for such sale.

d. alt of the above

6. The issuance of a note by an entity for services received should be recorded as

a. a Notes Payable.
b. a Prepaid Expense.
c. an Accounts Receivable.
d. an Unearned Revenue.

7. Expenses can be defined as

a. increases in ow ner's equity.

b. decreases in ow ner's equity.

c. inflows of assets from delivering or producing goods or rendering services.

d. decreases in econom ic benefits in the form o f outflows or depletions of assets

or incurrences of liabilities that result in decreases in equity.

8. A credit entry decreases the balance of

a. owner's equity.
b. liabilities.
c. income.
d. assets.

9. The company collected in full an account receivable. Considering this transaction

alone,

a. equity will increase.

b. total assets will increase.
c. total assets will decrease.
d. total assets will remain the same.

10. Withdrawals by the proprietor has all of the following effects except

a. reduction of cash balance.

b. reduction of total assets.
c. reduction of ow ner's equity.
d. reduction of profit for the period.

11. Another way of stating the accounting equation is

a. O wner's Equity + Assets = Liabilities

b. Assets + Liabilities = Owner's Equity
c. Assets = Liabilities - Owner's Equity
d. Assets - Liabilities = Owner's Equity
e. Assets * Owner's Equity — Liabilities

3-25
 12. All of the following affect the owner's equity account except

a. withdrawal by the owner.

b.additional investment
c. payment of a liability.
d. original investment.

13. When a business entity receives payment before delivering goods, the Unearned
Revenue account is

a. debited.
b. credited.
c. debited and credited.
d. not affected.

14. Obligations which are expected to be liquidated through the use of existing current
assets or the creation of other current liabilities are called

a. current assets. . ff
b. current liabilities.
c. long-term liabilities.
d. unearned revenues.

15. The sale (at cost) of an asset on credit

a. increases assets and liabilities.

b. decreases assets and liabilities.
c. leaves total assets unchanged.
d. decreases assets and increases liabilities.

16. W hen an entity pays employees for their services, the effect is an increase in J

a. assets.
b. income.
c. liabilities.
d. expenses. -v jH 2

17. The acquisition of an asset on credit

a. leaves total assets unchanged.

b. increases assets and liabilities.
c. increases assets and owner's equity.
d. decreases assets and increases liabilities.

3-26
18 . The payment of a liability

a. decreases assets and owner's equity.

1 increases assets and decreases liabilities.
I decreases assets and increases liabilities.
I decreases assets and liabilities.

19. A revenue

a. leaves total assets unchanged.

b. increases assets and liabilities.
c. increases assets and owner's equity.
d. increases assets and decreases owner's equity.

20. A current asset which includes coins, currencies and bank deposits is called

a. Cash.
b. Cash Equivalents.
c. Notes Receivable.
d. Accounts Receivable.

21. The expectation of a future payment from a customer for goods sold is

a. a Prepaid Expense.
b. a Notes Receivable.
c. an Accounts Receivable.
d. all of the above

22. Decrease in asset may

a. decrease another asset.

b. decrease liabilities.
c. increase liabilities.
d. increase capital.

21. This account records long-term debt of the business entity for which it has pledged
certain assets as security

a. Bonds Payable
b. Notes Payable
c. Accounts Payable
4 Mortgage Payable
 24 The accounting equation

a is used to determine the amount of liabilities ow ed.

b* is used to determine the amount of profit earned during the period.
c. shows the claims on the owner's equity by the creditors.
d. shows the claims on the entity's assets by both the creditors and o w n e r.

25. When an entity receives cash for services performed,

a. an asset is decreased.
b. the owner's equity is increased.
c. the owner's equity is decreased.
d. total assets remain unchanged.

26. An owner's withdrawal

a. increases assets and owner's equity.

b. increases assets and decreases owner's equity.
c. decreases assets and owner's equity.
d. decreases assets and increases owner's equity.

27. Which of the following is a liability of a firm?

a. cash in the firm's safe

b. a building owned by the firm
c. money owed to the firm by its debtors
d. money which the firm has borrowed and has not yet repaid *

28. Which is false concerning the rules of debit and credit?

a. The normal balance of any account appears on the side for recording increases,

b. The word "debit" means to increase and the word "credit" means to decrease. ,

c. The left side of an account is always the debit side and the right side is always
the credit side.

d. Increases in assets and expenses are debit entries, and increase the liabilities,
equality and revenue are credit entries.

29. Which of the following items has no effect on owner's equity?

a. revenue
b. expense
c. withdrawals
d. land acquired
 Which of the following is an asset of a firm?

I the capital of the firm

b. c o m p u te r equipm ent owned by the firm

c an overdrawn balance on the firm's bank account

<1 money owed by the firm to one of its suppliers in respect of goods purchased on
credit

31 . An investment by the owner in a business increases

a. assets only.
b. assets and liabilities.
c. assets and owner's equity.
d. liabilities and owner's equity.

32. The acquisition of an asset for cash

a. increases assets and liabilities.

b. increases assets and owner's equity.
c. decreases assets and increases liabilities.
d. leaves total assets unchanged.

33. Revenues should be recorded when

a. they are earned.

b. a contract is signed.
c. work has begun on a job.
d. cash is received from the customer.

34. The purchase of a service vehicle on account will

a. decrease equity.
b. decrease asset and decrease liability.
c. increase asset and increase a liability.
d. increase asset and decrease a liability.

An expense

a. leaves owner's equity unchanged.

b. is basically the same as a liability.
c. decreases owner’s equity.
d. decreases assets and liabilities.
&Problem #1
Transaction Effects on the Basic Accounting Model

During the m onth of May, Galicano Del M undo Com pany had th e fo llo w in g transactions;

A L OE j

a. Paid salaries for M ay, P54,000. _______ ________ ______ _

b. Acquired equipment on credit, P90,000. _______ ________

c. Purchased supplies in cash, P3,000. '_______ ______

d. Additional investment by owner, P120,000. ' -B

e. Received payment for services rendered,

P18,000.

f. M ade partial payment on equipment

acquired on credit, P30,000.

g. Billed customers for services performed,

P48,000.

h. W ith d re w cash for personal use, P45,000.

i. Received paym ent from customers already

billed, P9,000.

j. Received bills for utilities to be paid next

m onth, P2.100.

Required:

For each transaction, indicate Whether the assets (A), liabilities (L) or ow n e r’s equ^ |
(OE) increased (+), decreased H , or did not change (o) by placing the appropriate sign|ff.
the appropriate column. • v 9 f
 NAME: SCORE:
SECTION: PROFESSOR:

f Problem #2
Effects of Changes in O w ner's Equity

Transaction Effect on Owner's Equity

H # _____________________
■ IncreaseDecrease No Effect
a. The owner invested P700,000 in the
business. ___________________________

b. Bought equipm ent on account,

P250,000. ;

c. Paid one-third of the bill ow ed to the

creditor.

d. Received P150,000 in fees. •

._________ - >

e. Paid salaries for the week, P35,000. ;

f. Withdrew P20,000 for personal use. _______________ "

g. Paid rent for the month, P12,000. Tw H

h. Supplies inventory decreased by

P5,000 during the month.

Required:

What effect does each of the transactions have on ow ner's equity?

3-31
 SCORE:
NAME:
PROFESSOR:
SECTION

Problem #3
Effects o f Tra n sa c tio n s

The following selected transactions were completed by E le o n o r T a n D e liv e ry

during July 2010:

1. Cash received from delivery services, P92,700.

' f. ' 2. Paid creditors on account, P20,000.
' 3. Received cash from owner as additional investment, P600,000.
_ _ _ _ _ 4. Paid advertising expense, P5,000.
_______ 5. Billed customers for delivery services on account, P55,200.
6. Purchased supplies for cash, P6,000.
______ 7. Paid rent for July, P20,000.
________ 3. Received cash from customers on account, P25,440.
9. Determined that the cost of supplies on hand was P I,440 so
- P4,560 of supplies were used during the month.
_ _ _ _ _ 10. Owner withdrew cash for personal use, P20,000.

Indicate the effects of each transaction on the space provided:

a. Increase an asset, decrease another asset.

b. Increase an asset, increase a liability.
c. Increase an asset, increase owner's equity.
d. Decrease an asset, decrease a liability.
e. Decrease an asset, decrease owner's equity.
 NAME: SCORE:
SECTION: PROFESSOR:

Problem #4
Financial Transaction W orksheet

On April 1, 2010, Dores Marie Pateno established a business to manage rental

properties. She completed the following transactions during the month:

a. Opened a business bank account with a deposit of P100/000 from personal

funds.
b. Purchased supplies on account, P I 1,500.
c. Received cash on fees earned for managing rental property, P45,000.
d. Paid rent on office and equipment for the month, P25,000.
e. Paid some accounts, P6,750.
f. Billed property owners for fees earned for managing rental property,
P32,500.
g. Paid telecommunications expenses for month, P9,800, and miscellaneous '
expenses, P7,750.
h. Paid office salaries, P15,000.
i. Determined that the cost of supplies on hand was P2,150.
j. W ithdrew cash for personal use, P10,000.

Assets Liabilities and Owner's Equity

Accounts Supplies Accounts Pateno,

Cash + Receivable + = Payable + Capital

Required:

Record the transactions using the financial transaction worksheet. Be able to describe
the nature of each increase or decrease in owner's equity.

3-33
 NAM E: SCORE:
S EC TIO N : PROFESSOR:

Problem #5
Recording Transactions in a Financial Transaction W orksheet

G erardo Bautista opened a dorm itory locator business near a college campus. He is th<
o w n e r of the proprietorship which he named Dorm itory Locators. During the firs
m onth of operations, July 2010, Bautista engaged in the following transactions:

a. Bautista invested P450,000 of his personal funds to start the business.

b. Purchased or^account office supplies costing P3,500.
c. Bautista paid P300,000 cash to acquire a parcel lot near an access road to a
college cam pus. He intends to use the land as a future site for his ow n
boutique dorm itory.
d. Bautista pre-qualified and signed-up clients for dorm itory ow ners. He
received cash of P19,000.
e. Paid P I ,000 on the account payable he created in transaction (b).
f. Paid P20,000 of personal funds for a vacation.
g. Paid for office rent, P4,000 and for utilities, P I,000.
h. Sold som e office supplies to another business at cost, P I,500.
i. W ith d re w P12,000 for personal use.

Required:

1. Record the transactions using a financial transaction worksheet.

2. A fter studying Chapter 6, be able to prepare the income statement, statement of

changes in equity and balance sheet for this problem.
 NAME: SCORE:
SECTION: PROFESSOR:

Problem #6
Effects of Transactions

Transactions may be classified based on their effects on the basic accounting model.
These are:

1. Increase in Assets = Increase in Ow ner's Equity

2. Increase in Assets = Increase in Liabilities
3. Increase in one’ Asset = Decrease in another Asset
4. Decrease in Assets = Decrease in Owner's Equity
5. Decrease in Assets = Decrease in Liabilities
6. Increase in Liabilities = Decrease in Owner's Equity
7. Increase in one Liability = Decrease in another Liability
8. Increase in Owner's Equity = Decrease in Liabilities
9. Increase in one Owner's Equity = Decrease in another Owner's Equity

Required: Classify the following events according to their effects on the accounting
equation by indicating one of the numbers above.

* a. Invested P140,000 cash and P8,000 worth of supplies into the business.
;- b. Received P84,000 for services rendered.
c. Purchased equipment on account, P74,000.
i________d. Paid P15,000 for supplies.
_ e. Paid salaries, P42,000.
i ' f: Acquired land for P350,000. i
_________g. Paid P40,000 on account from the letter "c" transaction.
^ h. Issued a promissory note for the balance of the letter "c" transaction.
j. Paid utilities, P4,000.
_ _ _ _ _ _ j. Paid P6,000 for supplies and P14,000 for equipment.
1, k. Received P94,000 for services rendered.
•V . 1. W ithdrew P40,000 cash for personal use.
m. Inventory of supplies showed P6,000 of supplies on hand.

3-3}
 NAM E: SCORE:
SECTIO N : PROFESSOR:

Problem #7 ^
Recording Transactions in T-Accounts

On Nov. 1, 2010, Aleli Dugan purchased a pest-control company from its previous
v ow ner. Dugan paid P520,000 from her personal checking account for assets consisting
o f pesticide supplies, P175,000 and spraying equipment, P345,000. The company is to
operate under the name of Dugan Pest Control. The following transactions occurred
during the m onth of November:

N ov. 1 Dugan invested additional P230,000 in the business.

2 Pest control service for customers was done on account,
P42,000.
3 Pesticide supplies were acquired on account, P39,500.
6 Spraying equipment costing P67,000 was acquired on account.
8 Pest control service was rendered for cash, P87,000.
10 Repairs were made to the equipment; P28,500 was paid in cash
14 Paid P17,000 for pesticide supplies acquired on Nov. 3.
15 Rendered pest control service for customers on account,
P63,000.
17 Paid for utilities, P9,500.
24 Paid P51,500 in salaries.
27 W ith d re w P60,000 for personal use.
29 Collected P12,000 for pest control services done on Nov. 2.

R e q u ire d :.

Record the transactions using T-accounts. The following accounts will be needed: Cash;
Accounts Receivable; Pesticide Supplies; Spraying Equipment; Accounts Payable; m
Dugan, Capital. •j p J H
 NAME: SCORE:
SECTION: PROFESSOR:

Problem #8
Recording Transactions in T-Accounts

Elizabeth Sorra withdrew P250,000 from her personal savings account on June 1, 2010,
and deposited the cash in an account for her newly established company, Sorra Carpet
Cleaning Service. During the month of June, the following transactions occurred:

June 1 Paid monthly rent for office space, P25,000.

2 Acquired cleaning supplies on account, P45,000.
5 Acquired a service vehicle for'P500,000 by issuing a note payable
in that amount, which will be due on May 31, 2011.
6 Received cash in the amount of P120,000 for carpet cleaning
services rendered to the PNB Main Building.
9 Paid P15,000 for cleaning supplies acquired on June 2.
13 Billed clients P325,000 for carpet cleaning services rendered.
m Paid utilities bill of P12,000.
16 Paid salaries of P64,000.
20 Received P215,000 cash from clients billed on June 13.
23 Sorra withdrew P75,000 from the business.

Required:
With the aid of T-accounts, record the transactions listed above. Use the following
accounts: Cash; Accounts Receivable; Cleaning Supplies; Service Vehicle; Notes Payable;
Accounts Payable; and Sorra, Capital..