ACCOUNTING FOR BUSINESS TRANSACTIONS

At the end of this module, the student should be able to:

• Analyze and state the effects of business transactions on

an entity’s assets and liabilities and owner’s equity and
record these effects in accounting equation form using the
financial transaction worksheet and the T-accounts.

• Distinguish revenue and receipts.

Accountants observe many events that they identify and measure in

financial terms.

Business transaction is the occurrence of an event or a condition

that affects financial position and can be reliably recorded.

Financial Transaction Worksheet

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:

Galicano Del Mundo decided to establish a sole proprietorship business and named it as Del Mundo Graphics
Design. Del Mundo is a graphic designer who has extensive experience in drawing, layout, typography, lettering,
diagramming and photography. He possesses the talent to visually communicate to a target audience with the
right combination of words, images and ideas.

Del Mundo Graphics Design can do the layout and production design of newspapers, magazines, corporate
reports, journals and other publications. The entity can create promotional displays; marketing brochures for
services and products; packaging design for products; and distinctive logos for businesses. He also enters into
agreements with clients for the progressive development and maintenance of their web sites. His initial revenue
stream comes from web designing.

The owner, Galicano Del Mundo, makes the business decisions. The assets of the company belong to Del Mundo
and all obligations of the business are his responsibility. Any income that the entity earns belongs solely to Del
Mundo.

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. The worksheet that follows shows the first
transaction of the Del Mundo Graphics Design. The dates are enclosed in parentheses.

During March 2020, the first month of operations, various financial transactions too place. These transactions
are described and analyzed as follows:

Mar. 1 Del Mundo started his new business by depositing P350,000 in a bank account in the name of Del Mundo
Graphics Design at BPI Poblacion Branch.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

Cash = Del Mundo, Capital

(1) P350,000 P350,000

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 P350,OOO 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 on
the accounting equation are as follows: increase in asset— cash from zero to P350,000 and increase in
owner's equity from zero to P350,000
At this point, the entity has no liabilities, and assets equal owner's equity.

Mar. 5 Computer equipment costing P145,000 is acquired on cash basis. The effect of the transaction on the
basic equation is:

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

=
Cash + Computer Equipment Del Mundo, Capital

(1) P350,000 = P350,000

(5) (145,000) P145,000 =
Bal. P205,000 + P145,000 = P350,000
P350,000 = P350,000

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—computer equipment by P 145,000. Note that the sums of the
balances on both sides of the equation are equal. This equality must always exist.

Mar. 9 Computer supplies in the amount of P25,000 are purchased on account.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

Computer Accounts
Computer = + Del Mundo, Capital
Payable
Cash + Equipment + Supplies

Bal. P205,000 P145,000 = P350,000

(9) P25,000 = P25,000
Bal. P205,000 + P145,000 + P25,000 = P25,000 + P350,000
P375,000 = P375,000

Assets don't have to be purchased in cash. It can also be purchased on credit. Acquiring the computer supplies
with a promise to pay the amount due later is called buying on account. This transaction increases both the
assets and the liabilities of the business. The asset affected is computer supplies and the liability created is an
accounts payable.
Mar. 11 Del Mundo Graphics Design collected P88,000 in cash for designing interactive web sites for two
exporters based inside the Ortigas Ecozone.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

Computer Computer Accounts

= + Del Mundo, Capital
Payable
Cash + Equipment + Supplies

Bal. P205,000 P145,000 P25,000 = P25,000 P350,000

(11) 88,000 = 88,000
Bal. 293,000 + P145,000 + P25,000 = P25,000 + P438,000
P463,000 = P463,000

The entity earned service income by designing web sites for clients. Del Mundo 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 P375,000 to P463,000.

Mar. 16 Del Mundo paid P 18,000 to Ceradoy Bills Express, a one-stop bills payment service company, for the
semi-monthly utilities.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

Accounts
Computer Computer = + Del Mundo, Capital
Payable
Cash + Equipment + Supplies

Bal. P293,000 P145,000 P25,000 = P25,000 P438,000

(16) (18,000) = (18,000)
Bal. P275,000 + P145,000 + P25,000 = P25,000 + P420,000
P445,000 = P445,000

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 March. 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 P445,000.

Mar. 17 The entity has service agreements with several Netpreneurs to maintain and update their web sites
weekly. Del Mundo billed these clients P35,000 for services already rendered during the month.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

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

Bal. P275,000 P145,000 P25,000 = P25,000 P420,000

(17) P35,000 = P35,000
Bal. P275,000 + P145,000 + P25,000 + P35,000 = P25,000 + P455,000
P480,000 = P480,000

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 client’s 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 P35,000.
Mar. 19 Del Mundo made a partial payment of P 17,000 for the Mar. 9 purchase on account.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

+ Computer + Computer + Accounts = Accounts + Del Mundo, Capital

Cash Equipment Supplies Receivable Payable

Bal. P275,000 P145,000 P25,000 P35,000 = P25,000 P455,000

(19) (17,000) = (17,000)
Bal. P258,000 + P145,000 + P25,000 + P35,000 = P8,000 + P455,000
P463,000 = P463,000

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 payment of cash on account has no effect on the asset—
computer supplies because the payment does not increase or decrease the supplies available to the business.

Mar. 20 Checks totaling P25,000 were received from clients for billings dated Mar. 17.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

+ Computer + Computer + Accounts = Accounts + Del Mundo, Capital

Cash Equipment Supplies Receivable Payable

Bal. P258,000 P145,000 P25,000 P35,000 = P8,000 P455,000

(20) (25,000) (25,000) =
Bal. P283,000 + P145,000 + P25,000 + P10,000 = P8,000 + P455,000
P463,000 = P463,000

Last Mar. 17, Del Mundo billed Clients for services already rendered. On Mar. 20, the entity was able to collect
from them. The asset—cash is increased by P25,000. The business should not record service income on Mar. 20
since it has already recorded the income last Mar. 17 , Total assets are unchanged. The business merely reduced
one asset—accounts receivable and increased another—cash.

Mar. 21 Del Mundo withdrew P20,000 from the business for his personal use.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

+ Computer + Computer + Accounts = Accounts + Del Mundo, Capital

Cash Equipment Supplies Receivable Payable

Bal. P283,000 P145,000 P25,000 P10,000 = P8,000 P455,000

(21) (20,000) = (20,000)
Bal. P263,000 + P145,000 + P25,000 + P10,000 = P8,000 + P435,000
P443,000 = P443,000

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. On Mar. 1, Del Mundo invested P350,000; both cash and owner's equity
increased. The 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. A cash withdrawal is exactly the opposite.
The P20,000 cash withdrawal transaction resulted to a reduction in both cash and owner's equity.
Mar. 27 Warlito Blanche Publishing submitted a bill to Del Mundo for P8,000 worth of newspaper advertisements
for this month. Del Mundo will pay this bill next month.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

+ Computer + Computer + Accounts = Accounts + Del Mundo, Capital

Cash Equipment Supplies Receivable Payable

Bal. P263,000 P145,000 P25,000 P10,000 = P8,000 P455,000

(27) = 8,000 (8,000)
Bal. P263,000 + P145,000 + P25,000 + P10,000 = P16,000 + P427,000
P443,000 = P443,000

Warlito Blanche rendered services on account. Del Mundo Graphics Design has incurred an expense in the amount
of P8,000 by availing of Warlito Blanche's services. There was no payment during the month. This advertising
expense resulted to a decrease in owner's equity and an increase in the liability—accounts payable.

Mar. 31 Del Mundo paid his assistant designer salaries of P15,000 for the month.

Del Mundo Graphics Design

Financial Transaction Worksheet
Month of March 2020

Assets = Liabilities + Owner's Equity

+ Computer + Computer + Accounts = Accounts + Del Mundo, Capital

Cash Equipment Supplies Receivable Payable

Bal. P263,000 P145,000 P25,000 P10,000 = P16,000 P427,000

(31) (15,000) = (15,000)
Bal. P248,000 + P145,000 + P25,000 + P10,000 = P16,000 + P412,000
P428,000 = P428,000

This transaction resulted to a reduction in owner's equity as well as a reduction in cash. By providing his services
to Del Mundo for the month, the assistant designer has created for the business an expense—salaries expense.

Use of T-Accounts
Analyzing and recording transactions using the accounting equation is useful in conveying a basic understanding
of how transactions affect the business. However, it is not an efficient approach once the number of accounts
involved increases. Double. entry system provides a formal system of classification and recording business
transactions.

Illustration.

The rules of debit and credit will be applied to the Del Mundo Graphics Design illustration for comparison. Three
transactions will be added to the example. Before being recorded, a transaction must be analyzed to determine
which accounts must be increased or decreased. After this has been determined, the rules of debit and credit
are applied to effect the appropriate increases and decreases to the accounts.
Mar. 1 Del Mundo started his new business by depositing P350,000 in a bank account in the name of Del Mundo
Graphics Design at BPI Poblacion Branch.

Mar-01 Assets (Increase) Owner's Equity (Increase)

Cash = Del Mundo's Capital
Debit Credit Debit Credit
(+) (-) (-) (+)

3-1 350,000 350,000 3-1

This transaction increased both the asset—cash and owner's equity. According to the rules of debit and credit,
an increase in asset is recorded as debit while an increase in owner's equity is recorded as credit; thus, the entry
is to debit cash and to credit Del Mundo, Capital. The transaction dates are placed on the left side of the amounts
for reference.

Mar. 2 Computer equipment is acquired by issuing a P50,000 note payable to Maribeth Buenviaje Office Systems.
The note is due in six months.

Mar-02 Assets (Increase) Liabilities (Increase)

Computer Equipment = Notes Payable
Debit Credit Debit Credit
(+) (-) (-) (+)

3-2 50,000 50,000 3-2

The transaction increased by P50,000 the asset—computer equipment and the liability—notes payable. Computer
equipment must be debited and notes payable must be credited.

Mar. 3 Del Mundo paid P15,000 to RF Refozar Suites for rent on the office studio for the months of March, April
and May.

Mar-03 Assets (Decrease) Assets (Increase)

Cash = Prepaid Rent
Debit Credit Debit Credit
(+) (-) (+) (-)

3-1 350,000 15,000 3-3 3-3 15,000

The entity paid advance rent for three months. A resource having future economic benefit—prepaid rent, is
acquired for a cash payment of P15,000. Increases in assets are recorded by debits and decreases in assets are
recorded by credits. The transaction resulted to a debit to prepaid rent and a credit to cash for P15,000. The
prepaid rent is consumed based on the passage of time so that after one month, P5,000 of the prepaid rent will
be transferred to the rent expense account.
Mar. 4 Received advance payment of P18,000 from Marco Polo Ortigas Hotel for web site updating for the next
three months.

Mar-04 Assets (Increase) Liabilities (Increase)

Cash = Unearned Revenues
Debit Credit Debit Credit
(+) (-) (-) (+)

3-1 350,000 15,000 3-3

3-4 18,000 18,000 3-4

The entity has an obligation to Marco Polo Ortigas Hotel for the next three months. This liability is called unearned
revenues. The asset—cash is increased by a debit of P18,000 and the liability—unearned revenues is increased
by a credit of P18,000. As it renders service, the entity discharges its obligation at a rate of P6,000 per month
for the next three months.

Mar. 5 Computer equipment costing P145,000 is acquired on cash basis.

Mar-05 Assets (Decrease) Assets (Increase)

Cash = Computer Equipment
Debit Credit Debit Credit
(+) (-) (+) (-)

3-1 350,000 15,000 3-3 3-2 50,000

3-4 18,000 145,000 3-5 3-5 145,000

This transaction increased the asset—computer equipment and decreased the cash. Assets are increased by
debits and decreased by credits; thus, computer equipment is debited and cash is credited for P 145,000.

Mar. 9 Computer supplies in the amount of P25,000 are purchased on account.

Mar-09 Assets (Increase) Liabilities (Increase)

Computer Supplies = Accounts Payable
Debit Credit Debit Credit
(+) (-) (-) (+)

3-9 25,000 25,000 3-9

The asset—computer supplies is increased by a debit of P25,000 while the liability account—accounts payable is
increased by a credit for the same amount.

Mar. 11 Del Mundo Graphics Design collected P88,000 in cash for designing web sites.

Mar-11 Assets (Increase) Owner's Equity (Increase)

Cash = Design Revenues
Debit Credit Debit Credit
(+) (-) (-) (+)

3-1 350,000 15,000 3-3

3-4 18,000 145,000 3-5
3-11 88,000 88,000 3-11

The transaction increased the asset—cash and increased the income account—design revenues. Assets are
increased by debits, income are increased by credits; hence, a debit of P88,000 to cash and a credit of P88,000
to design revenues is made. Increases in income increase owner's equity.
Mar. 16 Del Mundo paid P 18,000 to Ceradoy Bills Express for the semi-monthly utilities.

Mar-16 Assets (Decrease) Owner's Equity (Decrease)

Cash = Utilities Expense
Debit Credit Debit Credit
(+) (-) (-) (+)

3-1 350,000 15,000 3-3

3-4 18,000 145,000 3-5
3-11 88,000 18,000 3-16 3-16 18,000

Expenses are increased by debits and assets are decreased by credits; therefore, utilities expense is debited and
cash credited for P18,000. Increases in expenses decrease owner's equity.

Mar. 17 Del Mundo billed clients P35,000 for services already rendered during the month.

Mar-17 Assets (Increase) Owner's Equity (Increase)

Accounts Receivable = Design Revenues
Debit Credit Debit Credit
(+) (-) (-) (+)

88,000 3-11
3-17 35,000 35,000 3-17

Assets are increased by debits, income are increased by credits. Increases in income increase owner's equity. A
debit of P35,000 to accounts receivable and a credit of P35,000 to the income account—design revenues is
needed.

Mar. 19 Del Mundo partially paid PI 7,000 for the Mar. 9 purchase of computer supplies.

Mar-19 Assets (Decrease) Liabilities (Decrease)

Cash = Accounts Payable
Debit Credit Debit Credit
(+) (-) (-) (+)

3-1 350,000 15,000 3-3 25,000 3-9

3-4 18,000 145,000 3-5 3-19 17,000
3-11 88,000 18,000 3-16
17,000 3-19

Assets are decreased by credits while liabilities are decreased by debits. The transaction is recorded by debiting
accounts payable and crediting cash for P 17,000 each.

Mar. 20 Received checks totaling P25,000 from clients for billings dated Mar. 17.

Mar-20 Assets (Increase) Assets (Decrease)

Cash = Accounts Receivable
Debit Credit Debit Credit
(+) (-) (+) (-)

3-1 350,000 15,000 3-3

3-4 18,000 145,000 3-5 3-17 35,000
3-11 88,000 18,000 3-16 25,000 3-20
3-20 25,000 17,000 3-19
Collections on account reduced the asset—accounts receivable but increased the asset—cash. Assets are
increased by debits and decreased by credits; thus, a debit to cash for P25,000 and a credit to accounts receivable
for P25,000 is made.

Mar. 21 Del Mundo withdrew P20,000 from the business for his personal use.

Mar-21 Assets (Decrease) Owner's Equity (Decrease)

Cash = Del Mundo, Withdrawals
Debit Credit Debit Credit
(+) (-) (+) (-)

3-1 350,000 15,000 3-3 3-21 20,000

3-4 18,000 145,000 3-5
3-11 88,000 18,000 3-16
3-20 25,000 17,000 3-19
20,000 3-21

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
P20,000 each is necessary.

Mar. 27 Warlito Blanche billed Del Mundo for P8,000 ads. Del Mundo will pay next month.

Mar-27 Liabilities (Increase) Owner's Equity (Decrease)

Accounts Payable = Advertising Expense
Debit Credit Debit Credit
(-) (+) (+) (-)

25,000 3-9
3-19 17,000 8,000 3-27 3-27 8,000

This transaction increased the expense—advertising expense and increased the liability—accounts payable by
P8,000. Expenses are increased by debits while liabilities are increased by credits; hence, an entry to debit
advertising expense and to credit accounts payable for P8,000 is needed.

Mar. 31 Del Mundo paid his assistant designer salaries of P 15,000 for the month.

Mar-31 Assets (Decrease) Owner's Equity (Decrease)

Cash = Salaries Expense
Debit Credit Debit Credit
(-) (+) (+) (-)

3-1 350,000 15,000 3-3

3-4 18,000 145,000 3-5 3-31 15,000
3-11 88,000 18,000 3-16
3-20 25,000 17,000 3-19
20,000 3-21
15,000 3-31

Expenses are increased by debits and assets are decreased by credits. Hence, salaries expense is debited for
P15,000 and cash credited for the same amount. Increases in salaries expense decrease owner's equity.
DISTINCTION BETWEEN REVENUES AND RECEIPTS
At this point, it will be useful to learn the distinction between revenues and receipts 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 Receipts Sales Revenue

1. Cash sales made this year. P200,000 P200,000 P200,000

Credit sales made last year;
2. cash received this year. P300,000 P300,000 0
Credit sales made this year;
3. cash received this year. P400,000 P400,000 P400,000
Credit sales made this year;
4. cash to be received next year. P100,000 0 P100,000

----------------------------Nothing follows-----------------------------

Reference: Ballada, Win. (2019). Basic Financial Accounting and Reporting: Domdane Publishers and
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