Fundamentals of Accounting Work Book S. Y.

2015-2016

CHAPTER THREE
THE ACCOUNTING EQUATION

Learning Outcomes:

After studying this chapter, you should be able to:

1. Prepare chart of accounts.

2. State the effect of business’ transactions on an entity’s assets, liabilities and owner’s equity.
3. Record transactions in a transaction worksheet.

Learning Focus

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.

An 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 owners(s), borrowing funds
from creditors, and purchasing or selling foods and services.

THE ACCOUNT

The basic summary device of accounting is the account. 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 and
decreases and balance of each element that appears in an entity’s financial statements. The simplest
form of the account is known as the “T” account.

Account Name

Left side or Right side or

Debit side Credit side

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THE ACCOUNTING EQUATION

The most basic tool of accounting is the accounting equation. This equation represents 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.

Assets = Liabilities + Owner’s Equity

Note that the assets are on the left side of the equation, opposite are the liabilities and owner’s
equity, which are on the right side. This explains why increases and decreases in assets are recorded
in the opposite manner as liabilities and owner’s equity are recorded. The equation further explains
why liabilities and owner’s equity follow the same rules of debit and credit.

DEBITS AND CREDITS – THE DOUBLE ENTRY SYSTEM

Accounting is based on a double-entry system which means the dual effects of a business transaction
are recorded. A debit side entry must have a corresponding credit side entry. 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. (from the Latin debere) and Cr.
(From the Latin credere), 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 debits.

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 owner’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.

NORMAL BALANCE OF AN ACCOUNT

The normal balance of any account refers to the side of the account – debit or credit – where
increases are recorded. Asset, owner’s withdrawal and expense accounts normally have debit
balances; liability, owner’s equity and income accounts normally have credit balances. This result
occurs because increases in an account are usually greater than or equal to decreases.

Increases Recorded by Normal Balance

Account Category
Debit Credit Debit Credit

Assets / /

Liabilities / /

Owner’s Equity:

Owner’s Capital / /

Withdrawals / /

Income / /

Expenses / /

TYPES AND EFFECTS OF TRANSACTIONS

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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. 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 claims (liabilities or
owner’s equity) account increases.
2. Exchange of Assets (EA). One asset account increases and another asset account decreases.
3. Use of Assets (UA). An asset account decreases and a corresponding claims (liabilities or
owner’s equity) account decreases.
4. Exchange of Claims (EC). One claims (liabilities or owner’s equity) account increases and
another claims (liabilities or owner’s equity) account decreases.

TYPICAL ACCOUNT TITLES USED

STATEMENT OF FINANCIAL POSITION

Current Assets

Cash includes coins, currencies, checks, bank deposits, and other cash items readily available for use
in the operations of the business.

Cash Equivalents are short-term investments that are readily convertible to known amounts of cash
which are subject to an insignificant risk to changes in value.

Trade and Other Receivables includes the amounts collectible from any of the following accounts:

 Accounts Receivable – is the amount collectible from the customer to whom sales have been
made or services have been rendered on account or credit.
 Notes Receivable – is a promissory note issued by the client or the customer in exchange for
services or goods received as evidence of his/her obligation to pay.
 Interest Receivable – amount of interest collectible in promissory notes received from
customers and clients.
 Advances to Employees – certain amount of money loaned to employee’s payable in cash or
through salary deductions.
 Accrued Income – income already earned but not yet received.

Inventories represent the unsold goods at the end of the accounting period. This is applicable only to
a merchandising business.

Prepaid Expenses include supplies bought for use in the business or services and benefits to be
received by the business in the future paid in advance.

Contra-Asset Account – these accounts deducted from the related asset accounts.

Allowance for Bad Debts are losses due to uncollectible accounts. This is deducted from the accounts
receivable account to get the net realizable value. This is in line with the financial statements’
qualitative characteristic of conservatism wherein no profits would be anticipated but all probable or
estimable losses should be provided.

Accumulated Depreciation represents the expired cost of property, plant and equipment as a result
of usage and passage of time. This is deducted from the cost of related asset account.

Non-Current Assets

Long-term Investments are assets held by an enterprise for the accretion of wealth through capital
distribution such as interest, royalties, dividends and rentals, for capital appreciation or for other

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benefits to the investing enterprise such as those obtained through trading relationships. Investment
are classified as long-term when they are intended to be held for an extend period of time.

Property, Plant, and Equipment are tangible assets that are held by an enterprise for use in the
production or supply of goods or services, or for administrative purposes and which are expected to
be used for more than one period.

 Landis a piece of lot or real estate owned by the enterprise on which a building can be
constructed for business purposes.
 Buildingis an edifice or structure used to accommodate the office, store, or factory of a
business enterprise in the conduct of its operations.
 Equipment includes typewriter, air-conditioner, calculator, filing cabinet, computer, electric
fan, and trucks, cars used by the business in its office, store, or factory. Specific account titles
may be used such as Office Equipment, Store Equipment, Delivery Equipment, Transportation
Equipment, Machinery and Equipment.
 Furniture and Fixtures include tables, chairs, carpets, curtains, lamp and lighting fixtures, and
wall decors. Specific account titles may be used such as Office Furniture and Fixtures and
Store Furniture and Fixtures.

Intangible assets are identifiable, non-monetary assets without physical substance held for use in
the production or supply of goods or services, for rental to others, or administrative purposes. These
include goodwill, patents, copyrights, licenses, franchises, trademarks, brand names, secret
processes, subscription lists and non-competition agreements.

Liabilities

Current Liabilities

Trade and Other Payables include payable from any of the following accounts:

 Accounts Payable includes debts arising from the purchase of an asset or acquisition of
services on account.
 Notes Payable includes debts arising from purchase of an asset or acquisition services on
account or evidence by a promissory note.
 Utilities Payable is an obligation to pay utility companies for services received from them.
Examples of this are telephone services to PLDT, electricity to Meralco, and water services to
Maynilad.
 Unearned Revenues represent obligations of the business arising from advance payments
received before goods or services are provided to the customer. This will be settled when a
certain goods or services are delivered or rendered.
 Accrued Liabilities include amounts owed to others for expenses already incurred but not yet
paid. Examples of these are salaries payable, utilities payable, taxes payable and interest
payable.

Current Portion of Long-Term Debt. These are portions of mortgage notes, bonds and other long-
term indebtedness which are to be paid within one year from the balance sheet date.

Loan Payable is a liability to pay the bank or other financing institution arising from funds borrowed
by the business from these institutions payable within twelve months or shorter. (Note: If loan is
payable within twelve months, then it is classified under non-current liabilities.)

Non-Current Liabilities

Non-current Liabilities are long-term liabilities or obligations which are payable for a period longer
than one year. Examples of Non-Current Liabilities are as follows:

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Mortgage Payable is a long-term debt of the business with security or collateral in the form of real
properties. In case the business fails to pay the obligation, the creditor can foreclose or caused the
mortgaged asset to be sold and the proceeds of the sale to be used to settle the obligation.

Bonds Payable is a certificate of indebtedness under the seal of a corporation, specifying the terms
of repayment and the rate of interest to be charged.

Owner’s Equity

Capital is an account bearing the name of the owner representing the original and additional
investment of the owner of the business increased by the amount of net income earned during the
year. It is decreased by the cash or other assets withdrawn by the owner as well as the net loss
incurred during the year.

Drawing represents the withdrawals made by the owner of the business either in cash or other
assets.

Income Summary is a temporary account used at the end of the accounting period to close income
and expense accounts. The balance of this account shows the net income and net loss for the period
before it is closed to the capital account.

INCOME STATEMENT
Income

Refers to increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decrease of liabilities that result in increase in equity, other than those
relating to contributions from equity participants. It encompasses both revenue and gain.

Revenue arises in the course of ordinary activities of an enterprise and is referred to by a variety of
different names including Sales, Fees, Interest, Dividends, Royalties and Rent.

Example:

Expenses

An expense involves the outflow of money, the use of other assets, or the incurrence of a liability.

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, 13 th month pay, cost of living allowances and other related
benefits.

Telecommunications, Electricity, Fuel and Water Expenses. Expenses related to use of

telecommunications, electricity, fuel and water.

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

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

Insurance Expense. Portion of premiums paid on insurance coverage (e.g. on motor vehicle, life, fire)
which has expired.

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Depreciation Expense. The portion of the cost of tangible asset 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.

ACCOUNTING FOR BUSINESS TRANSACTIONS

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 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: INITIAL TRANSACTIONS

The worksheet that follows shows the first transaction of Carlah Accounting Services. It is a firm that
provides wide range of bookkeeping and accounting services. During March 2015, the month of
operations, various financial transactions took place. These transactions described and analyzed as
follows:

Mar. 1 Carlah started his new business by depositing P350, 000 in a bank account in the
name of Carlah Enterprises at PNB Poblacion Branch.

ASSETS = LIABILITIES + OWNER'S EQUITY

Cash = + Carlah, Capital
P350,000 = + P350,000

The financial transaction is analyzed as follows:

 An entity separate and distinct from Carlah’s personal financial affairs is created.
 An economic resource – cash of P350, 000 is invested in the business entity. The owner’s
equity account is Carlah, Capital.
 The dual nature of the transaction is that cash is invested and owner’s equity is created. The
effects of this transaction 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 a cash basis. The effect of the
transaction on the basic equation is:

ASSETS = LIABILITIES + OWNER'S EQUITY

Computer
Cash + = + Carlah, Capital
Equipment
Ba
l P350,000 = P350,000
(5) (145,000) 145,000 =
Ba
l 205,000 + 145,000 = + P350,000
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350,000 = 350,000
Fundamentals of Accounting Work Book S. Y. 2015-2016

 This transaction did not change the total assets but it did change the composition of the
assets – it decreased on asset – cash and increased another asset – computer equipment by
P145, 000. Note that the sums of the balances on both sides of the equation are equal. This
equality must always exist.

Mar. 9 Carlah placed an order for toner, fax paper, bond paper, CDs, pens, folders and other
supplies that had a total of P25,000 on account.

OWNER'S
ASSETS = LIABILITIES +
EQUITY
Computer
Cash + + = Accounts Payable + Carlah, Capital
Supplies Equipment
Bal P205,000 + P145,000 = + P350,000
(9) + P25,000   = P25,000   
Bal P205,000 + P25,000 + P145,000 = 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
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
supplies and the liability created is an accounts payable.

Mar. 11 Carlah Accounting Services collected P88, 000 in cash from clients for accounting and
bookkeeping services.

OWNER'S
ASSETS = LIABILITIES +
EQUITY
Computer Accounts
Cash + + = + Carlah, sssCapital
Supplies Equipment Payable
Bal P205,000 + P25,000 + P145,000 = P25,000 + P350,000
(11) 88,000 = 88,000
Bal P293,000 + P25,000 + P145,000 = P25,000 + P438,000
P463,000 = P463,000

 The entity earned service income by providing accounting and bookkeeping services for
clients. Carlah rendered her 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 Carlah paid P18, 000 to Bills Express, a one-stop bills payment service company, for the
semi-monthly utilities.
OWNER'S
ASSETS = LIABILITIES +
EQUITY
Computer Accounts
Cash + + + Carlah, Capital
Supplies Equipment Payable
Bal P293,000 + P25,000 + P145,000 = P25,000 + P438,000
(16) (18,000) (18,000)
Bal P 275,000 + P25,000 + P145,000 = P25,000 + P420,000
P445,000 = P445,000

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 Expenses are recorded when they are incurred. Expenses can be paid in cash when occur, or
they can be paid later. The payment of 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 Entrepreneurs to maintain and update
their books of accounts. Carlah billed these clients P35, 000 for services already
rendered during the month.

OWNER'S
ASSETS = LIABILITIES +
EQUITY
Accounts Computer Accounts
Cash + + + = + Carlah, Capital
Receivable Supplies Equipment Payable
Bal P275,000 P25,000 P145,000 P25,000 P420,000
(17) P35,000 P35,000
Bal P275,000 P35,000 P25,000 P145,000 = P25,000 P455,000

P480,000 = P480,000

 The entity has performed services to clients so income should already be recognized. Carlah
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 P35, 000.

Mar. 19 Carlah made a partial payment of P17, 000 for the Mar. 9 purchase on account.

OWNER'S
ASSETS = LIABILITIES +
EQUITY
Accounts Computer Accounts Carlah,
Cash + + Supplies + = +
Receivable Equipment Payable Capital
Bal P275,000 + P35,000 + P25,000 + P145,000 = P25,000 + P455,000
(19
) (17,000) (17,000)
Bal P258,000 P35,000 + P25,000 + P145,000 = 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.
OWNER'S
ASSETS = LIABILITIES +
EQUITY
Cash + Accounts + Computer + Computer = Accounts + Carlah, Capital
Receivable Supplies Equipment Payable
Bal P258,000 + P35,000 + P25,000 + P145,000 = P8,000 + P455,000
(20
) 25,000 (25,000)
Bal P283,000 + P10,000 + P25,000 + P145,000 = P8,000 + P455,000
P463,000 = P463,000

 Last Mar. 17, Carlah billed clients for services already rendered. On Mar. 20, the entity was
able to collect P25, 000 from them. The asset – cash is increased by P25, 000.

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 The business should not record service income on Mar. 20 since it has already recorded last.
Marc. 17. Total assets are unchanged. The business merely reduced asset – accounts
receivable and increased another – cash.

Mar. 21 Carlah withdrew P20, 000 from the business for this personal use.

OWNER'S
ASSETS = LIABILITIES +
EQUITY
Cash + Accounts + Supplies + Equipment = Accounts + Carlah,
Receivable Payable Capital
Bal P283,000 + P10,000 + P25,000 + P145,000 = P8,000 + P455,000
(21) (20,000) (20,000)
Bal P263,000 + P10,000 + P25,000 + P145,000 = 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, Carlah invested P350, 000;
both cash and owner’s equity increased. The transaction was an investment by the owner
and not an income-generating activity. Carlah 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. Duran Restaurant submitted a bill to Carlah for P8, 000 worth of services rendered during
the meeting with the staff and during overtime.

OWNER'S
ASSETS = LIABILITIES +
EQUITY
Cash + Accounts + Supplies + Equipment = Accounts + Carlah,
Receivable Payable Capital
Bal P263,000 + P10,000 + P25,000 + P145,000 = P8,000 + P435,000
(27) 8,000 (8,000)
Bal P263,000 + P10,000 + P25,000 + P145,000 = P16,000 + P427,000
P443,000 = P443,000

 Durant rendered services on account. Carlah Enterprises has incurred an expense in the
amount of P8, 000 by availing of Durant’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 Carlah paid her staff salaries of P15, 000 for the month.

OWNER'S
ASSETS = LIABILITIES +
EQUITY
Cash + Accounts + Supplies + Equipment = Accounts + Carlah,
Receivable Payable Capital
Bal P263,000 + P10,000 + P25,000 + P145,000 = P16,000 + P427,000
(31) (15,000) (15,000)
Bal P248,000 + P10,000 + P25,000 + P145,000 = P16,000 + P412,000
P428,000 = P428,000

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 This transaction resulted to a reduction in owner’s equity as well as a reduction in cash. By

providing his services to Carlah for the month, the staffs has created for the business an
expense – salaries expense.

References:

1. Ballda, W. (2015). Basic Accounting. Padre Campa St., Sampaloc, Manila: Domdane
Publishers & Made Easy Books

2. Beticon, J., Garcia, E., Ireneo, S., James,G.,(2013). Fundamentals of Accounting, Volume
1, (2013).

3. Ong, Flocer Lao, (2012). Fundamentals of Accounting, Textbook for Beginners, Third
Edition. South Triangle Quezon City, Philippines: C & E Publishing, Inc.

MULTIPLE CHOICES. Write the letter of the best answer beside the item number.

1.Which of the following would be classified as a current asset?

a. Accounts receivable c. Short-term investment

b. Supplies inventory d. All of the above

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

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

3. When the proprietor withdraws cash or other assets, the withdrawal account is
a. Debited and credited. C. Credited.
b. Debited. D. Not affected.

4. In the accounting equation, an increase in asset can be associated with

a. An increase in a liability c. An increase in another asset.
b. A decrease in a liability d. A decrease in owner’s equity.

5. When an entity acquires computer equipment for cash,

a. Assets and owner’s equity are increased
b. An asset is increased and liability is decreased
c. One asset increased while the another is decreased
d. One asset is increased and another is also increased

6. Inventories are assets which are

a. In the form of materials or supplies to be consumed in the production process or in
rendering of services.
b. Held for sale in the ordinary course of business.
c. In the process of production for later sale.
d. All of the above

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

a. A notes payable. C. A prepaid expense.
b. An accounts receivable d. An unearned revenue.

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8. Expenses can be defined as

a. Increases in owner’s equity.
b. Decreases in owner’s equity.
c. Inflows of assets from delivering or producing goods or rendering services.
d. Decreases in economic benefits in the form of outflows or depletions of assets or
incurrences of liabilities that result in decreases in equity.

9. A credit entry decreases the balance of

a. Owner’s equity. C. Liabilities.
b. Income. D. Assets.

10. The company collected in full an account receivable. Considering this transaction alone,
a. Equity will increase c. Total assets will increase.
b. Total assets will decrease. D. Total assets will remain the same.

11. Withdrawals by the proprietor has all the effects except

a. Reduction of cash balance. C. Reduction of total assets.
b. Reduction of owner’s equity d. Reduction of profit for the period.

12. Another way of stating the accounting equation is

a. Owner’s equity + assets = liabilities c. Assets + liabilities = owner’s equity
b. Assets = liabilities – owner’s equity d. Assets- liabilities= owner’s equity

13. All of the following affect the owner’s equity account except,
a. Withdrawal by the owner. C. Additional investment.
b. Payment of a liability. D. Original investment.

14. When a business entity receives payment before delivering goods, the unearned revenue
account is
a. debited. C. Credited.
b. Debited and credited. D. Not affected.

15. 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. C. Current liabilities.
b. Long-term liabilities d. Unearned revenues.

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

a. Increases assets and liabilities. C. Decreases assets and liabilities.
b. Leaves total assets unchanged. D. Decreases assets and increases liabilities.

17. When an entity pays employees for their services, the effect is an increase in
a. Assets. c. Income.
b. Liabilities d. Expenses.

18. The acquisition of an asset on credit

a. Leaves total assets unchanged. C. Increases assets and liabilities.
b. Increases assets and owner’s equity. D. Decreases assets ad increases liabilities.

19. The payment of liability

a. Decreases assets and owner’s equity. C. Increases assets and decreases liabilities.

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b. Decreases assets and increases liabilities. D. Decreases assets and liabilities.

20. A revenue
a. Leaves total revenue unchanged. C. Increases assets and liabilities.
b. Increases assets d. Increase assets and decreases owner’s
equity.

21. A current asset which includes coins, currencies and bank deposits is called
a. Cash. C. Cash equivalents.
b. Notes receivable . d. Accounts receivable.

22. The expectation of a future payment from a customer for goods sold is
a. A prepaid expense. C. A notes receivable.
b. An accounts receivable. D. All of the above.

23. Decrease in asset may

a. Decrease another asset. C. Decrease liabilities.
b. Increase liabilities. D. Increase capital.

24. This account records long-term debts of the business entity for which it has pledged certain
assets as security.
a. Bonds payable. C. Notes payable.
b. Accounts payable d. Mortgage payable.

25. The accounting equation

a. Is used to determine the amount of liabilities owed.
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 owner.

26. When an entity receives cash for services performed,

a. An asset is decreased. C. The owner’s equity is increased.
b. The owner’s equity is decreased. D. Total assets remained unchanged.

27. An owner’s withdrawal

a. Increases assets and owner’s equity. C. Increases assets and decreases owner’s
equity.
b. Decreases assets and owner’s equity. D. Decreases assets and increases owner’s
equity.

28. 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 creditors
d. Money which the firm has borrowed and has not yet repaid

29. Which is false concerning the rules in 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 entries, an increase in the liabilities,
equality and revenue are credit entries.

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30. Which of the following has no effect on owner’s equity?

a. Revenue c. Expense
b. Withdrawals d. Land acquired

31. Which of the following is an asset of a firm?

a. The capital of the firm
b. Computer equipment by the firm
c. An overdrawn balance in the firm’s bank account
d. Money owned by the firm to one of its suppliers in respect of goods purchased on credit

32. An investment by the owner in a business increases

a. Assets only. C. Assets and liabilities.
b. Assets and owner’s equity. D. Liabilities and owner’s equity.

33. The acquisition of an asset for cash

a. Increases assets and liabilities. C. Increases assets and owner’s liabilities.
b. Decreases assets and increases liabilities. D. Leaves total assets unchanged.

34. Revenues should be recorded when

a. They are earned. C. A contract is signed.
b. Work has begun on a job. D. Cash is received from the customer.

35. The purchase of a service vehicle on account will

a. Decrease in equity. C. Decrease assets and decrease liability.
b. Increase asset and increase a liability. D. Increase asset and decrease a liability.

TRUE OR FALSE

Write “T” if the statement is correct and letter “F” if incorrect.

___ 1. The left-hand side of the account refers to its credit side while the right-hand side refers
to the debit side.

___ 2. The debit side of an account is for the value received while the credit side is for the value
parted with in a transaction analysis.

___ 3. Business transactions are analyzed from the point of the business rather than the owner.

___ 4. An assets normal balance is a debit while that of a liability is credit.

___ 5. To debit an asset is to increase the balance of its account while to credit is to decrease its
balance.

___ 6. Creditors are given the first priority over the assets of the business in case of liquidation.

___ 7. The reason why land is not subject to depreciation is that it is expected to be useful to the
business enterprise for an indefinite period of time.

___ 8. When drawing account is debited, the balance of the account decreased.

___ 9. When a debit entry is bigger than the credit entry, the account is said to have a debit
balance.

___ 10. Withdrawals by the proprietor has the effect of reducing profit for the period.

___ 11. Payment of liability has the effect of reducing cash balance.

APRIL ANN ORIA 23

Fundamentals of Accounting Work Book S. Y. 2015-2016

___ 12. Prepaid expenses are assets and must be shown in the balance sheet.

___ 13. Unearned income is an account title for an income collected or received in advance
although not yet earned.

___ 14. Accrued expenses has a semblance of a liability.

___ 15. An accounting information system is the combination of personnel records and
procedures that a business uses to meet its need for financial information.

___ 16. Accounts that appear on the left side of the accounting equation usually have credit
balances.
___ 17. Payment of liability will not affect total assets but will cause total liabilities to decrease.

APRIL ANN ORIA 24

 ACCOUNTING FUNDAMENTALS: The Accounting Equation 2017

Identifying Balance Sheet Accounts & Income Statement Accounts.

For each of the following, write I if it is income statement item and B if it is a balance sheet item

_____ 1. Interest Expense _____ 11. Salaries Expense

_____ 2. Interest Receivable _____ 12. Accounts Payable

_____ 3. Mortgage Payable _____ 13. Prepaid Rent

_____ 4. Interest Income _____ 14. Insurance Expense

_____ 5. Miscellaneous Expense _____ 15. Cash

_____ 6. Drawing Account 16. Used Supplies

_____ 7. Supplies Expense 17. Unearned Revenue

_____ 8. Supplies 18. Prepaid Expense

_____ 9. Equipment 19. Professional Fee

_____ 10. Building 20. Sales

ELEMENTS OF FINANCIAL STATEMETNS

Assets Liabilities Owner’s Equity

a. 760,000 360,000 ____________

b. 860,000 ___________ 592,000
c. ___________ 108,000 760,000
d. 626,600 376,240 ___________
e. ___________ 800,000 ( 100,000 )

Required: Fill in the amount of the missing element of financial position.

ELEMENTS OF FINANCIAL STATEMENTS

a. Jose Manalo Pet Control has assets of P600,000 and owner’s equity of P450,000.

b. Margie Clavano has liabilities of P530,000 and owner’s equity of P410,000.

c. Marko Fuentes Plumbing Contractor has assets of P473,000 and liabilities of P153,700.

d. Ryan Morales Acting Studio has liabilities of P147,000 and owner’s equity of P236,500.

e. Monarco Dance has assets of P624,000 and liabilities of P237,000.

Required: Compute the amount of the missing element of financial position.

M. B. PUMIHIC, CPA 26
 ACCOUNTING FUNDAMENTALS: The Accounting Equation 2017

Transaction Effect on the Basic Accounting Model

Give the effect on the accounting equation by putting a (+) sign to indicate an increase and a (-)
sign to indicate a decrease on the transactions enumerated below. Identify also the specific account
affected by the transaction.

A L OE
a. Received cash as additional investment. _____ _____ _____
b. Purchased supplies for cash. _____ _____ _____
c. Borrowed money from the bank. _____ _____ _____
d. Rendered services to cash customers. _____ _____ _____
e. Billed customers for services rendered. _____ _____ _____
f. Collected on account receivable in full. _____ _____ _____
g. Paid creditors on account _____ _____ _____
h. Returned supplies which were purchased on account. _____ _____ _____
i. Paid advertising expense. _____ _____ _____
j. Purchased equipment, 25% down payment, balance on credit. _____ _____ _____

RECORDING TRANSACTIONS IN A FINANCIAL TRANSACTION WORKSHEET

M. B. PUMIHIC, CPA 27
 ACCOUNTING FUNDAMENTALS: The Accounting Equation 2017

On March 1, 2016, Marites Abon, M.D., established the Abon Sports Rehab Clinic. Transactions
completed during the month of March as follows:

a. Abon deposited P250,000 in a bank account in the name of the business.

b. Paid rent for the month, P11,000.

c. Bought supplies on account form Shaw Book Store, P11,700.

d. Bought Professional equipment on account from Rizal Machines, P58,000.

e. Bought office equipment on account from Marikina Office Warehouse, P8,640.

f. Performed professional Services for cash, P48,200.
g. Settled a portion of the accounts with Rizal Machines, P18,500.
h. Received and paid the bill for utilities P38,000

i. Paid salaries of assistants, P21,500.

j. Rendered professional services for cash P38,000.
k. Abon withdrew cash for personal use P16,000

Record the transactions for the month of March 2016 using a financial transaction worksheet. Use the
following accounts: Cash, Accounts Receivable, Supplies, Office Equipment, Professional Equipment,
Accounts Payable and Abon Capital. If the owner’s equity account is affected by a transaction, identify it
as revenue, expense, investment or withdrawal.

Cash Acc. Supplies Office Prof. Acc. Abon,

Receivable Equip’t Equip’t Payable Capital
a.

b.

c.

d.

e.

f.

g.

h.

i.

j.

k.

TOTAL

M. B. PUMIHIC, CPA 28
 ACCOUNTING FUNDAMENTALS: The Accounting Equation 2017

RECORDING TRANSACTIONS IN A FINANCIAL TRANSACTION WORKSHEET

On December 1, 2016, Ludivina Victorino opened a videotape rental store by investing P250,000 cash
from her personal savings account. During the month of December, the following transactions took
place:

Dec 1 Acquired supplies on account, P67,000.

4 Acquired videotapes costing P235,000, on account.
5 Paid 85,000 to creditors.
8 Received P78,000 cash from ACA Video for rental fees.
11 Billed Video City for video rentals P105,000
16 Paid salaries P65,000.
17 Collected P77,000 from Video City.
23 Victorino withdraw P47,000 from the business.
24 Paid rent for the month P41,500.
30 Paid utilities bill for the month P17,500.

Required: Record transactions for the month of December 2016 using a financial transaction worksheet.
Use the following accounts: Cash, Accounts Receivable, Supplies, Videotapes, Accounts Payable, and
Victorino, Capital. If the owner’s equity account is affected by a transaction, identify it as revenue,
expense, investment or withdrawal.

Cash Acc. Receivable Supplies Videotapes Acc. Payable Victorino, Capital

Dec. 1

11

16

17

23

24

30

TOTAL

M. B. PUMIHIC, CPA 29
ACCOUNTING FUNDAMENTALS: The Accounting Equation 2017

M. B. PUMIHIC, CPA 30