Based on the video lecture by Sir Carlo Pinto, I acquired a foundational knowledge on the basic

accounting equation, assets equals liabilities plus owner’s equity (Asset=Liabilities Owner’s Equity). One
important rationale of this equation is the fact that companies increase their resources through
borrowing from creditors or investing from the owner. This equation can however be expanded into
assets equals liabilities plus owner’s capital minus owner’s withdrawal plus income minus expenses
(Asset=Liabilities + [Owner’s Capital-Withdrawals+Income-Expenses]). An understanding on this
equation can served as a guide in transaction analysis which is just a part of the accounting cycle. In the
video, it was mentioned that accounting cycle usually covers a period of one month and thereafter the
cycle continues. Transaction analysis, journalizing, posting, trial balance, adjustment, preparation of
financial statements and closing entries are the chronological order of the accounting cycle.

Transaction analysis is the first step in accounting cycle. Since companies may maintain many
accounts composing the financial statement elements, relevant transactions need to be stored and
organized consistently in the form of chart of accounts which is a list of all accounts maintain by an
entity with an account number. The chart of accounts depends on the business needs, the type and
form of business, rules set by the accounting body and the business preference. Transactions involve at
least two accounts. In order to analyze a transaction, it is important to determine what account is
affected and by how much. To reiterate, the understanding on the basic accounting equation is an
important application.

For example, On June 1, 2020 Justine Cute invested 500,000 to organize a laundry service
business by opening a bank account in BDO in the name of JC Laundry Services. The existence of
relevant information with at least two accounts involved is an indication that such economic event is a
financial transaction. To analyze why this is a financial transaction is because of capital valued at 500,000
which increases the owner’s capital (an owner’s equity account) and increases the cash (an asset
account) of JC Laundry Services. Suppose on the same day, the entity purchased laundry equipment
worth 100,000 then assets are affected as cash account decreased by 100,000 and the equipment
account increased by 100,000. Suppose on June 3, 2020, the entity rendered laundry services worth
3,000 cash then income account increases by 3,000 and the cash account by 3,000. Suppose on June 4,
2020, the entity borrowed 50,000 in the form of loan agreement with Louisa Financing Company to have
an additional cash needed for the business operations then this increase both assets and liabilities as the
cash account (asset) increase by 50,000 and the loans payable account (liability) increased by 50,000.
Suppose on June 5, Justine Cute withdraw 2,000 cash for personal use and on the same day the entity
incurred transportation expense worth 300. The former affects the assets as cash decreased by 2,000
and owner’s equity as withdrawal increased by 2,000 while the latter decrease assets as cash decreased
by 300 and increase expenses as transportation expense increase by 300. The effects of the foregoing
transactions are analyzed as follows in the form of accounting equation.

Assets = Liabilities + Owner’s Capital - Withdrawals + Income - Expenses

Date Cash + Equipment Loans Payable + Justine Cute, Capital - Justine Cute, Withdrawal + Service Income- Transportation Expense
Jun-01 500,000 500,000
-100,000 100,000
Jun-03 3000 3000
Jun-04 50,000 50,000
Jun-05 -2,000 2,000
-300 300
450,700 100,000
Balance 550,700 Balance 550,700