LIVING ANGELS CHRISTIAN ACADEMY

SY 2020-2021

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, and MANAGEMENT 1

The Accounting Equation

Effects of Owner’s Investment/Withdrawal and Cash Acquisition of Assets

Illustration

Give the effect of the following transactions on the assets and owner’s equity:

Transaction Assets Liabilities Owner’s Equity Analysis

1. Owner invests Assets increase Capital Increases Cash increases because
cash in the owner invests cash in the
business. business which is an asset.
Owner’s interest in the
business increases as
represented by an increase
in capital.
2. Owner invests Assets increase Capital Increases Assets increase because
furniture. owner invests furniture in
the business which is an
asset. Owner’s interest in
the business increases
because of the investment
as represented by an
increase in capital.
3. Owner Assets decrease Capital Assets decreases because
withdraws cash decreases owner withdraws cash
for personal use. which is an asset. Owner’s
interest in the business
decreases because of the
withdrawal as represented
by a decrease in capital.
4. Owner Assets increase/ Supplies increase because
purchases decrease of the purchase but cash
supplies using decreases because of the
cash. payment. Since both are
assets, one asset increases
while another asset
correspondingly decreases.
5. Owner gets Assets increase/ Cash increases because of
cash refund for decrease the refund but supplies
returning decrease because of the
damaged return. Since both are
supplies bought assets, one asset increases
on cash. while another asset
correspondingly decreases.
6. Owner Assets increase/ Furniture increases because
purchases decrease of the purchase but cash
decreases because of the
furniture using payment. Since both are
cash assets, one asset increases
while another asset
correspondingly decreases.
7. Owner makes Assets increase Capital increase Assets increase because
additional cash owner invests additional
investment cash in the business which is
an asset. Owner’s interest in
the business increases
because of the investment
as represented by an
increase in capital.
8. Owner Assets decrease Capital Assets decreases because
withdraws decreases owner withdraws supplies
supplies for from the business which is
personal use an asset. Owner’s interest in
the business decreases
because of the withdrawal
as represented by a
decrease in capital.

Effects of Income earned and payment of Expenses

Illustration

Give the effect of the following transactions on the assets and owner’s equity:

Transaction Assets Liabilities Owner’s Equity Analysis

1. Rendered Assets increase Capital increases Assets increase because
services for cash owner collected cash as a
result of services rendered.
Owner’s equity increases
because the business
earned income for services
rendered.
2. Rendered Assets increase Capital increases Assets increase because of
services on account collectible from the
credit customer which is an asset
as a result of services
rendered. Likewise, owner’s
equity increases because of
income earned from
services rendered.
3. Paid Assets decrease Capital Assets decrease because
telephone bill decreases owner pays cash for the
telephone bill. Owner’s
equity decreases because
the telephone bill
represents utilities expense
which decreases capital.
 Effects of Transactions on the Accounting Equation

The following are illustration on the effect of transactions on the accounting equation. The
abbreviations in the examples shall mean the following:
INC – Increase DEC – Decrease NC – No Change
Transaction Assets Liabilities Owner’s Equity Analysis
1. Owner invests INC NC INC An entity separate and
cash distinct from the owner is
created. The cash
investment of the owner
increases the assets of the
business and the capital of
the owner.
2. Owner invests INC NC INC The equipment increases
equipment the assets of the business.
Since this is an investment
of the owner, capital of the
owner increases
correspondingly.
3. Renders INC NC INC The business earned an
services for cash income by rendering
services and collecting
revenues in cash. The effect
in the accounting equation
is an increase in cash for
the cash collected and an
increase in capital as
revenue increases capital.
4. Renders INC NC INC Assets increase by the
services on amount of revenue
credit expected to be collected
from the customer to
whom the services were
rendered. Capital also
increases since rendering of
services represents
revenue.
5. Collects INC/DEC NC NC Assets increase as there is
account in cash inflow in the amount
transaction No. of the collection. However,
4 assets correspondingly
decrease with the amount
of the collection as the
accounts receivable, an
asset account, will
decrease. This is because
the amount the customer
owes has already been
collected.
6. Purchases INC INC NC Supplies increase the assets
supplies on of the business and the
credit liabilities correspondingly
increase as the supplies
 were bought on account or
credit.
7. Returns DEC DEC NC Assets decrease with the
defective amount of supplies
supplies returned. Liabilities
correspondingly decrease
as the returned supplies
decrease the amount owed.
8. Pays the DEC DEC NC The transaction is a
supplies bought payment of account. Since
on account or there is cash outflow
credit representing the payment
of an existing liability,
assets decrease in the
amount of cash paid and
liabilities decrease in the
amount of liability on
supplies paid.
9. Borrows cash INC INC NC Cash increases the assets of
issuing a note the business as there is an
inflow of cash because the
business borrowed money.
Notes payable increases the
liabilities of the business as
it represents an obligation
on the part of the business
to pay at a future date.
10. Purchases INC/DEC NC NC Land increases the assets of
land using cash the business but cash
correspondingly decreases
due to the payment for the
purchase of land.
11. Pays utilities DEC NC DEC Payment represents cash
expense for the outflow decreasing the
month assets of the business.
Expenses decrease the
capital as they have
opposite effect on income.
12. Pays the DEC DEC NC The transaction is a
note in full payment of liability. Since
there is cash outflow
representing the payment
of the note, assets decrease
in the amount of cash paid
and liabilities decrease in
the amount of the notes
payable.

Ong, Flocer Lao (2016). Fundamentals of Accountancy, Business, and Management. Quezon City: C&E Publishing, Inc.