Department of Education

FUNDAMENTALS OF ACCOUNTING,
BUSINESS & MANAGEMENT 1
Grade 11
BUSINESS TRANSACTION ANALYSIS
Q4 Week 2 - Module 2

Constancia V. Laxamana
Writer

Florinda M. Berroya
Validator

MADELINE ANN L. DIAZ

Quality Assurance Team Chair

Schools Division Office – Muntinlupa City

Student Center for Life Skills Bldg., Centennial Ave., Brgy. Tunasan, Muntinlupa City
(02) 8805-9935 / (02) 8805-9940
 Lessons
2
Business Transaction Analysis

Content Standard: The learners demonstrate an understanding of…

 the business transactions and their analysis to include definition and nature of business
 transactions, types of source or business documents, and the rules of debits and credits.

Performance Standards: The learners are able to

• identify business and nonbusiness transactions,
• enumerate the types of business documents,
• recite the rules of debit and credit, and apply these to simple cases

Most Essential Learning competencies: The learner…

 analyze common business transactions using the rules of debit and credit ABM_FABM11- IIIg-j-27
 solve simple problems and exercises in the analyses of business transaction ABM_FABM11-IIIg-j-28

Multiple Choice

1. These are identifications or brief descriptions of items that fall to some kind, class, or nature.
a. Account Code c. Account Titles
b. Journal d. Ledger

2. Refers to all assets that are expected to be realized, sold, or consumed within the enterprise's normal operating cycle.
a. Current Assets c. Non-current assets
b. Tangible Assets d. Intangible Assets

3. These are tangible assets which are held by an enterprise for use in production, rental, administrative, etc.
a. Current Assets c. Tangible Assets
b. Intangible Assets d. Property, Plant and Equipment

4. Two classifications of assets

a. Current Assets and Noncurrent Assets c. Tangible and intangible assets
b. Current Liabilities and Non-current liabilities d. Cash and Accounts Receivable

5. Account title used to describe money

a. Cash c. Accounts Receivable
b. Notes Receivable d. Short term investment

6. Account title for amounts collectible arising from services rendered.

a. Accounts Payable c. Account Receivable
b. Notes Receivable d. Notes Payable
7. It as a contra-account shown as a deduction to accounts receivable.
a. Allowance for Bad Debts c. Accumulated depreciation
b. Amortization of intangible assets d. Owner’s Drawing

8. These are accounts deducted from related accounts.

a. Contra Accounts c. Current account
c. Debit accounts d. Credit accounts

9. An account title for the site where the building used as office or store is constructed.
a. Building c. Land
b. Equipment d. Furniture and Fixtures

10. These are financial long-term obligations of an enterprise which are payable for more than one year.
a. Current Liabilities c. Current Assets
b. Non-Current Liabilities d. Non-current Assets

11. An account title for financial obligation of an enterprise.

a. Accounts Receivable c. Accounts payable
b. Cash d. Unearned revenue

12. A financial obligation of an enterprise which requires a fixed on tangible property to be pledged as collateral to ensure
payment.
a. Mortgage payable c. Notes Payable
b. Current portion of a long-term debt d. Bonds

13. An accounting device used to summarize the effect of changes in Assets, Liabilities, and Owner's Equity.
a. Journal c. Ledger
b. Income Statement d. Balance Sheet

14. System used in accounting which records the dual effect of a business transaction.
a. Double entry bookkeeping c. Single entry bookkeeping
b. Cash basis of Accounting d. Accrual basis of Accounting

15. These are the economic activities of a business which can be measured and expressed in terms of money.
a. Business transactions c. Accounts
b. Debits d. Credits

The word account was introduced in Module 4. Let’s recall what is an Account?

An account is a record in an accounting system that tracks the financial activities of a specific asset, liability, equity,
revenue, or expense. These records increase and decrease as the business events occur throughout the accounting period.
Each individual account is stored in the general ledger and is used to prepare the financial statements at the end of an
accounting period.

There are five main types of accounts used in an accounting system. Each of these are represented in the expanded
accounting equation. Assets = Liabilities + Owner’s Equity + Revenues – Expenses.
Assets are resources that the company can use to generate revenues in current and future years. Asset accounts have a
debit balance and are always presented on the balance sheet first.

Liabilities represent the debt obligations that the company owes to creditors. This can include bank debt and other financial
creditors. Liability accounts have a credit balance and appear below assets on the balance sheet.

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

Revenue and expense accounts are technically both temporary equity accounts, but they are significant enough to mention
separately.

Revenue accounts track the income generated by the business. These items have a credit balance and increase total equity.

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

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

In short: Accounts are records of business transactions categorized on the basis of the accounting equation.

https://www.myaccountingcourse.com/accounting-dictionary/account

TRANSACTIONS

Business activity is all about transactions. A transaction is any event that has a financial impact on the business and can be
measured in monetary values. For example, Lazada and Shopee are into online business and they are thriving in this time of
pandemic. These entities pay riders to deliver their goods. They have merchants who sells products online. These
merchants borrow money, and repays the loan—three (3) separate transactions.

But not all events qualify as transactions. These two companies have their advertising featured in every social flatforms, and
it motivates you to buy their products. But no transaction occurs until someone actually buys a product. A transaction must
occur before these entities record anything. Transactions provide objective information about the financial impact on a
company. Every transaction has two sides:

■ You give something, and

■ You receive something

In accounting we always record both sides of a transaction. And we must be able to measure the financial impact of the
event on the business before recording it as a transaction.
Business Transactions occur on a daily basis as a result of doing business. Items are purchased or sold, credit is extended or
borrowed, income is made or expenses are assumed. These business transactions result in changes to the three elements of
the basic accounting equation.

A business transaction has an effect on any of the accounting elements – assets, liabilities, capital, income, and expense.

Transactions may be classified as exchange and non-exchange. Exchange transactions involve physical exchange such as
purchasing, selling, collection of receivables, and payment of accounts.

Non-exchange transactions are events that do not involve physical exchanges but where changes in monetary values are
determinable, e.g. wear and tear of equipment, fire loss, typhoon loss, etc.

A transaction that increases total assets must also increase total liabilities or owner’s equity.
A transaction that decreases total assets must also decrease total liabilities or owner’s equity.
Some transactions may increase one account and decrease another on the same side of the equation i.e. one asset
increases and another decreases.

Assets = Liabilities + Owner’s Equity

+ +
+ +
- -
- -
+ and -

Regardless of the nature of the specific transaction, the accounting equation must stay in balance at all times.

Accounting Transaction Analysis

The accounting transaction analysis is the process of translating the business activities and events that have a measurable
effect on the accounting equation into the accounting language and writing it in the accounting books. It could also be
described as the process of reconciling the differences made to each side of the equation with each financial transaction
occurs. This is the first stage in the accounting cycle, which is the foundation of accounting, regardless of the accounting
type you are interested in. Businesses analyze to ensure that the balance sheet equation stays in balance after each
transaction is completed.
Six Steps of Accounting Transaction Analysis

1. Determine if the event is an accounting transaction

You first need to determine whether this transaction is a business nature transaction. An accounting transaction has to
involve a monetary amount. So, if the company signed a rental contract, there is no accounting transaction. However, if it
makes a payment under this contract, it will be an accounting transaction because it has a monetary amount that the
company will need to record. Other examples include a purchase of equipment, sale of products, and salary payments.

2. Identify what accounts it affects

Your next step is to identify which accounts the transaction will affect. For example, the owner invested ₱380,000 in cash
and a used truck with a market value of ₱780,500 in the business in exchange for the company’s ownership. The cash and
truck invested will be assets for that business, recorded under Cash account and Delivery Equipment account. In exchange
for that investment, the owner will get claim against the assets of the business so it will also affect the Capital account.

3. Determine what type of accounts they are

Every transaction leads to a measurable change in the accounting equation. Knowing whether the account belongs to
assets, liabilities, or equity will allow you to determine whether the account will have a debit or credit normal balance. In
the example above, we already decided that the two accounts will be Asset accounts, and the Owner’s Equity.

4. Determine which accounts are going up or down (increase or decrease)

A business records a transaction with an entry that has a debit and credit effect. This double-entry procedure keeps the
accounting equation in balance. So, when the owner invested cash, the cash and Delivery equipment accounts will increase
because the company will now have more money, and a truck. The capital account will also increase.

5. Apply the rules of debits and credits to these accounts

One has to record each business transaction in two or more related but opposite accounts. We debit one account and
credit the other Account in the same transaction amount. Accounts on the left side increase with a debit entry and
decrease with a credit entry while accounts on the rise in the right side with a credit entry and decrease with a debit. So, if
the Cash and Truck accounts will increase, and it is an asset account, the business will debit it. The Capital is the Equity
account, which increases with a credit entry.

6. Find the transaction amount to be entered into each account

Your final step would be to determine the amount of the transaction from the business records, such as receipts,
invoices, and bank statements (source documents).

YOUR KEY TAKE AWAYS

 An accounting system must record all business transactions to ensure complete and reliable information when the
financial statements are prepared.
 A business transaction is an activity or event that can be measured in terms of money and which affects the financial
position or operations of the business entity.
 A business transaction has an effect on any of the accounting elements – assets, liabilities, capital, income, and expense.
 Transactions may be classified as exchange and non-exchange.
 To qualify as an accountable/recordable business transaction, the activity or event must:
1. Be a transaction involving the business entity
2. Be of a financial character (in a certain amount of money)
3. Have a dual or "two-fold" effect on the accounting elements
4. Be supported by a source document
Accounting Transaction Analysis Table

When going through the six steps of the accounting analysis, it is easier to analyze by filling out an accounting transaction
analysis table, such as one below. Let’s go over the example transaction, explaining it step by step and filling the table.

For example, the owner invested ₱380,000 in cash and a used truck with a market value of ₱780,500 in the business in
exchange for the company’s ownership.

Account Classification Increase/Decrease Debit/Credit Amount

Cash Asset Increase Debit ₱380,000
Delivery equipment Asset Increase Debit ₱780,500
Capital Owner’s equity Increase Credit ₱1,160,500

Another example to summarize our analysis. The business bought office supplies on account amounting to ₱3,850.
Account Classification Increase/Decrease Debit/Credit Amount
Office Supplies Asset Increase Debit ₱3,850
Accounts Payable Liability Increase Credit ₱3,850

Let’s use another transaction analysis table below using (+) & (-) sign.
Example:

Asset Liabilities + OE Amount

(+ Debit) (+ Credit) ₱
(- Credit) (- Debit)
1. The owner deposits ₱150,000 in the Cash (+) Capital (+) 150,000
checking account to begin operations
2. The business purchases a computer Office Equipment (+) Accounts Payable (+) 25,000
for office use on credit, for ₱25,000.
3. The business purchases office Office Supplies (+) 5,500
supplies using ₱5,500 cash. Cash (-)
4. A business purchases a building for Building (+) 1,500,000
₱1,500,000 with a ₱250,000 cash
Cash (-) 250,000
down-payment and a Mortgage
loan for the ₱1,250,000 payable in 5
Mortgage payable (+) 1,250,000
years.
5. The business rendered services for Cash (+) Service revenue (+) 12,000
₱12,000 cash.
6. The business pays its rent for the Cash (-) Rent Expense (-) 9,500
month ₱9,500 using a company
check.
7. The business’ owner withdraws Cash (-) Owner’s drawing (-) 20,000
₱20,000 for his personal use.
8. The business rendered services to a Accounts Receivable (+) Service revenue (+) 24,000
customer on account, ₱24,000.
9. The business paid transaction Cash (-) Accounts Payable (-) 25,000
number 2.
10. Collected ₱15,000 from customer in Cash (+) 15,000
transaction number 8. Accounts Receivable (-)

From the above illustration, we can now draw the following rules.
 Accounting Element Normal Balance To Increase To Decrease
1. Assets Debit Debit Credit
2. Liabilities Credit Credit Debit
3. Capital Credit Credit Debit
4. Withdrawal Debit Debit Credit
5. Income Credit Credit Debit
6. Expense Debit Debit Credit

An alternative way to easily remember the rules of debit and credit is by using your left and right hand. Left hand is Debit
for Asset, Owner’s Drawing and Expenses. Right hand is Credit Liabilities, Owner’s Equity and Revenue. Both Debit and
Credit here means Increase.

Another easy to remember method is the use of the “T – Account. A T-account has its left side and right side which is Debit
and Credit in Accounting. Both sides would increase or decrease and account.

DEBIT CREDIT

A – asset L = liabilities
W – withdrawal E – expenses O = owner’s equity
R = revenue

For the rest of the discussions, we shall use the terms debit and credit rather than left and right.

When a financial transaction occurs, it affects at least two accounts. For example, purchase of machinery for cash is a
financial transaction that increases machinery and decreases cash because machinery comes in and cash goes out of
business. The increase in machinery and decrease in cash must be recorded in the machinery account and the cash
account respectively. As stated earlier, every ledger account has a debit and a credit side. Now the question is that on
which side the increase or decrease in an account is to be recorded. The answer lies in the learning of normal balances of
accounts and the rules of debit and credit.

Normal Balance of Accounts

The understanding of normal balance of accounts helps understand the rules of debit and credit easily. If the normal
balance of an account is debit, we shall record any increase in that account on the debit side and any decrease on the
credit side. If, on the other hand, the normal balance of an account is credit, we shall record any increase in that account
on the credit side and any decrease on the debit side.

The normal balance of all asset and expense accounts is debit, whereas the normal balance of all liabilities, and equity (or
capital) accounts is credit. The normal balance of a contra account (to be discussed in the succeeding modules) is always
opposite to the main account to which the particular contra account relates.

Now what is the significance of the "normal balance"?

When you place an amount on the normal balance side, you are increasing the account. If you put an amount on the
opposite side, you are decreasing that account. Therefore, to increase an asset, you debit it. To decrease an asset, you
credit it. To increase liability and capital accounts, credit. To decrease them, debit.

To summarize the rule:

Account Normal balance Debit Credit

Assets Debit Increase Decrease
Liabilities Credit Decrease Increase
Owner’s equity Credit Decrease Increase
Revenue Credit Decrease Increase
Expense Debit Increase decrease
*Contra account Opposite to the relevant normal account

Contra accounts examples:

 Accounts Receivable is an asset account that normally has a debit balance. The Allowance for Doubtful Accounts
is a contra account to the accounts receivable and normally has a credit (opposite) balance.
 Accumulated depreciation account – a contra asset account
 Sales returns and allowances account – a contra revenue account
 Sales discount account – a contra revenue account
 Drawing account – a contra equity account
 Treasury stock account – a contra equity account
 Bonds discount account – a contra liability account

As the normal balance of a contra account is always opposite to the normal balance of the relevant main account, it
causes a reduction in the reporting amount of the main account.

A summary of the whole discussion about rules of debit and credit is given below:

A debit is an accounting entry that either increases an asset or expense account. Or decreases a liability or equity account. It
is positioned on the left in an accounting entry.

A credit is an accounting entry that increases either a liability or equity account. Or decreases an asset or expense account.
It is positioned on the right in an accounting entry.
The following example may be helpful to understand the practical application of rules of debit and credit explained in above
discussion. The following transactions are related to Small Car Salon:

Transaction Account title Asset Liability Owner’s

Debit (+) Credit (+) Equity
Credit (-) Debit (-) Credit (+)
Debit (-)
₱ ₱ ₱
Started business with cash Cash 95,000
₱95,000. Capital 95,000

Furniture purchased for cash Furniture and Fixture 8,000

to be used in business ₱8,000. Cash (8,000)

Purchased office supplies for Office supplies 40,000

cash ₱40,000. Cash (40,000)

Purchased office supplies on Office supplies 57,000

credit from Big Traders Accounts Payable 57,000
₱57,000.

Rendered services for cash Cash 15,000

₱15,000. Service Revenue 15,000

Purchased equipment for Equipment 4,000

business ₱4,000. Paid cash. Cash (4,000)

Rendered services on credit to Accounts Receivable 15,000

John Auto Repair Shop Service Revenue 15,000

*Paid salary to employees Salary expense (12,000)

₱12,000 Cash (12,000)
*Note that this is an expense account – to increase expense, it should be debit.

http://content.moneyinstructor.com/1435/accounting-transaction.html

YOUR KEY TAKE AWAYS

 Rules of Debit and Credit: Left versus Right

 An “account” is a storage unit that stores similar items or transactions.
 Debit and Credit - Debit means left and credit means right. Do not associate any of them with plus or minus yet.
 Debit simply means left and credit means right – that's just it! "Debit" is abbreviated as "Dr." and "credit", "Cr.".
The terms originated from the Latin terms "debere" or "debitum" which means "what is due", and "credere" or "creditum" which means
"something entrusted or loaned".
  Normal Balance - Each account has a debit and a credit side. You could picture that as a big letter T, hence the
term "T-account". Again, debit is on the left side and credit on the right. Normal balance is the side where the
balance of the account is normally found.
 Asset accounts normally have debit balances, while liabilities and capital normally have credit balances. Income
has a normal credit balance since it increases capital. On the other hand, expenses and withdrawals decrease
capital, hence they normally have debit balances.

Tip: You don't need to memorize the whole table. Just be familiar with the normal balance portion and you'll be okay. The
normal balance is the same as the action to increase the account. The action to decrease the account is simply the opposite
of that.

Let’s Try These:

1. To increase Office Equipment, debit or credit?

2. To increase Rent Payable
3. To record/increase Rent Expense
4. To decrease Accounts Payable
5. To record/increase Service Revenue
6. To decrease Cash
7. To record/increase Loss from Fire
8. To decrease Delivery Equipment
9. To increase Accumulated Depreciation

Answers:
1. Debit; 2. Credit; 3. Debit; 4. Debit; 5. Credit; 6. Credit; 7. Debit; 8. Credit. 9.

What about item #9? How do you increase Accumulated Depreciation?

Accumulated Depreciation is a contra-asset account (deducted from an asset account). For contra-asset accounts, the rule
is simply the opposite of the rule for assets. Therefore, to increase Accumulated Depreciation, you credit it.

We will apply these rules and practice some more when we get to the actual recording process.

Activity 1

1. Determine the account title to be used.

2. Write whether the transaction will increase (+) or decrease (-) the account
3. Classify the account according to 5 major accounts. Write them in the appropriate box. The first one is done for you.

Transaction Assets / Expense Liabilities / Owner’s

Equity / Revenue

1. Cash investment of owner into the business Cash ( + ) Capital (+)

2. The company borrows ₱8,000 from a bank
 3. Paid the full amount of loan in (b)
4. Bought equipment using company’s cash.
5. Bought office supplies using company’s cash.
6. Purchase office supplies on account.
7. Paid the account in (f)
8. Rendered services for cash
9. Rendered services to a customer on account
10. Collected cash from customer in (i)
11. Owner withdrew cash for personal use.

Activity 2

Use the accounting transaction analysis table to analyze the following transactions.

Transaction Analysis Table

Account Type Increase / Decrease Debit / Credit Amount
Example: Owner invested 50,000 cash to start a business.
Cash Asset Increase Debit 50,000
Owner’s Capital Owner’s Equity Increase Credit 50,000

Following are the first ten transactions completed by A. P. Morato’s new business called Morato’s Repair Shop:
1. Started the business with a cash deposit of ₱400,000 to a bank account in the name of the business.
2. Paid three months’ rent in advance on the shop space, ₱45,000.
3. Purchased repair equipment for cash, ₱142,000.
4. Completed repair work for customers and collected cash, ₱12,000.
5. Purchased additional repair equipment on credit from Lenney Company, ₱57,000.
6. Completed repair work on credit for Joe Malone, ₱25,000.
7. Paid Lenney Company ₱30,000 of the amount owed from transaction (e).
8. Paid the local radio station ₱5,000 for an announcement of the shop opening.
9. Joe Malone paid for the work completed in transaction (f).
10. Withdrew ₱3,500 cash from the bank for A. P. Morato to pay personal expenses.

Fill in the blanks.

Write debited; credited or no entry

1. Maria starts business with 150,000 cash. Maria’s capital will be .

2. The business purchase supplies for 5,000 cash. The supplies account will be .
3. The business purchase office furniture. The office furniture account will be .
4. The business rendered services for 7,000 cash. The revenue account will be .
5. 8,000 cash is paid to a creditor. The accounts payable account will be .
6. 10,000 is paid to a worker as his monthly salary. Salary expense account will be .
7. The owner of the business withdrew 5,000 for personal use. Owner’s withdrawal account will be
.
8. When revenue / income is earned, revenue account will be .
9. When an expense is incurred, expense account will be .
10. When liability is increased. The account will be .
 11. When asset is increased. The account will be
12. When owner’s equity is increased the account will be .
13. When revenue is increased. The account will be .
14. When expense is increased. The account will be .
15. When liability is decreased. The account will be .
16. When asset is decreased. The account will be
17. When owner’s equity is decreased the account will be .
18. When revenue is decreased. The account will be .
19. When expense is decreased. The account will be .
20. When accumulated depreciation is increased. The account will be .

Analyze the following. Write Debit or Credit.

1. To increase Office Equipment

2. To increase Rent Payable
3. To record/increase Rent Expense
4. To decrease Accounts Payable
5. To record/increase Service Revenue
6. To decrease Cash
7. To record/increase Loss from Fire
8. To decrease Delivery Equipment
9. To increase Accumulated Depreciation
10. To increase Accounts Receivable

Direction: For each item below, choose the letter that corresponds to your answer.

1. A debit represents:
a. An increase in equity c. An increase in liability
b. An increase in asset d. A decrease in asset

2. A credit represents:
a. A decrease in equity c. A decrease in liability
b. An increase in asset d. A decrease in asset

3. Ms. Mini Mo invests 78,000 cash into a business. It will be

a. Credited to cash c. Debited to cash
b. Debited to capital d. Debited to equity

4. Salary paid to an employee will be:

a. Debited to the employee c. Credited to the employee
b. Debited to salary expense d. Credited to cash
5. Which of the following will be credited?
a. A decrease in liability c. An increase in asset
b. An increase in liability d. None of these

6. A credit to an asset means that the asset has:

a. Increased c. Decreased
b. No change d. None of these

7. An increase in the liability account is recorded on the

a. Credit side c. Debit side
b. Any side d. No entry is made

8. If the owner withdraws cash from the business for personal use. It should be recorded as
a. Debit to owner’s drawing c. Credit to owner’s drawing
b. Debit to cash d. Credit to owner’s capital

9. The company receives cash from a bank loan. It should be recorded as:
a. Debit to cash c. Debit to loan payable
b. Credit to cash d. Credit to owner’s equity

10. The company repays the bank that had lend money to them. It should be recorded as:
a. Debit to cash c. Credit to cash
b. Credit to loan payable d. Debit to accounts receivable

11. The company purchase its equipment with its cash. It should be recorded as:
a. Debit to cash c. Debit to equipment
b. Credit to accounts payable d. Debit to accounts payable

12. The company purchase a significant amount of supplies on credit. It should be recorded as:
a. Debit to cash c. Debit to supplies account
b. Credit to supplies account d. Credit to cash

13. The company paid utility bills

a. Debit to cash c. Debit to utility expense
b. Credit to utility expense d. Credit to accounts payable

14. All of the following will cause owner’s equity to increase. Which one will not?
a. Owner’s cash investment c. Owner’s delivery truck investment
b. Net profit d. Owner’s personal withdrawal

15. The accounting equation should remain in balance because every transaction affects how many accounts?
a. Only one c. Only two
b. Two or more d. Only three

References

https://corporatefinanceinstitute.com/resources/knowledge/accounting/chart-of-accounts/
https://businessmirror.com.ph/2018/10/31/philippine-accounting-standards/
https://www.principlesofaccounting.com/chapter-1/accounting-equation/
https://www.accountingverse.com/accounting-basics/what-is-accounting.html
https://www.accountingcoach.com/chart-of-accounts/explanation/2
Key to Correction