COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION

FINANCIAL ACCOUNTING AND

REPORTING

PROF. ADRIAN A. ILAGAN, CPA, MBA

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Lesson 3
Types and Effects of Transactions

Learning Objectives:
At the end of the lesson, you should be able to:
 Use with proficiency the typical account titles used.
 Explain the types and effects of transactions.

Lesson Overview:

The application of double-entry, classification of accounts, the use of typical

account titles should be an innate ability of an accounting student. This can help in analyzing
business transaction and provide a capacity to make a useful economic decision.

One anime character has once said, “knowing the name of an attack heightens its power
compared to its strength when the wielder does not know its name”. Knowing the transactions and
the names of the accounts to be used will give you the cutting edge in accounting!

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Engagement

If you were given one million pesos (P1,000,000) and must use it all in just one day, how will
you spend it? Can you list down the things you’ll spend it with and their corresponding
values/amounts?

TOTAL P 1, 000, 000

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Explore
The Typical Account Titles Used in Financial Reporting
Asset accounts

Liability Accounts

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Owner’s Equity Accounts

Income Accounts

Expense Accounts

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Types and Effects of Transactions

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Although business entities engage in numerous transactions, all transactions can be classified
into one of four types, namely:
1. Source of Assets (SA). An asset account increases and a corresponding claim (liabilities
or owner’s equity) account increases. Example: (1) Purchase of supply on account; (2)
sold goods on cash on delivery basis.

2. Exchange of Assets (EA). One asset account increases and another asset account
decreases. Example: bought an equipment for cash.

3. Use of Assets (UA). An asset account decreases and a corresponding claim (liabilities or
owner’s equity) account decreases. Example: (1) payment of loan; (2) paid salaries of
employees.

4. Exchange of Claims (EC). One claim (liabilities or owner’s equity) account increases
and another claim (liabilities or owner’s equity) account decreases. Example: receiving
utility bills and not paying yet.

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Explain
NAME: _______________________________________________ SCORE: ______________
COURSE: _____________________________________________ DATE: _______________
From your list made on our engage portion, classify each as either Source of Asset,
Exchange of Asset, Use of Asset and Exchange of Claims.
Example: Pay my debts P40,000 Use of Assets

TOTAL P 1, 000, 000

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Extend

The four type of transactions above may be further expanded into nine types of effects. These
can be reflected better using the accounting equation from the previous lesson.
Let’s take a look at the table below and use a simple accounting equation as 9 (assets) = 6
(liabilities) + 3 (equity) with each of the following transactions amounting to 1:
Effects of Transaction Effects on
Accounting Equation
1. Increase in assets = Increase in liabilities (SA) (9 + 1) = (6 + 1) + 3
2. Increase in assets = Increase in owner’s equity (SA) (9 + 1) = 6 + (3 + 1)
3. Increase in one asset = Decrease in another asset (EA) (9 + 1) – 1 = 6 + 3
4. Decrease in assets = Decrease in liabilities (UA) (9 - 1) = (6 - 1) + 3
5. Decrease in assets = Decrease in owner’s equity (UA) (9 - 1) = 6 + (3 - 1)
6. Increase in liabilities = Decrease in owner’s equity (EC) 9 = (6 + 1) + (3 - 1)
7. Increase in owner’s equity = Decrease in liabilities (EC) 9 = (6 - 1) + (3 + 1)
8. Increase in one liability = Decrease in another liability 9 = (6 + 1) - 1 + 3
9. Increase in one owner’s equity = decrease in another owner’s 9 = 6 + (3 + 1) - 1
equity (EC)

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EVALUATE

NAME: _______________________________________________ SCORE: ______________

COURSE: _____________________________________________ DATE: _______________

Classification of events. Indicate whether each transaction is a Source of assets, Use of assets,
Exchange of assets or Exchange of claims.
1. Performed service for cash
2. Incurred operating expenses on account.
3. Performed services for clients on account.
4. Purchased land with cash.
5. Invested cash in time deposit.
6. Paid cash for rent expenses.
7. Made cash distribution to the owner.
8. Collected cash from accounts receivable.
9. Paid cash on accounts payable
10. Received cash investment from the owner.

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