ANALYZING

BUSINESS
TRANSACTIONS
 The Accounting Equation
 Analyzing Business Transactions
 Transactions Affecting Both sides
of Accounting Equation
 Transactions Affecting one side of
the Accounting Equation

CHAPTER 2
ANALYZING BUSINESS TRANSACTIONS

 What is an Accounting Equation?

 The accounting equation denotes that the total assets owned by a particular entity should always
equal the total equities or the total financial claims against those assets.

1. Assets = Equities
Components of equities
a. Creditor’s equity – the equity of outside sources of assets
b. Owner’s equity – the equity provided by internal source

2. Assets = Liabilities + Capital

Also called the entity theory which emphasizes the importance of the income statement or
the proper income determination

3. Assets – Liabilities = Capital

Also called the proprietary theory which is directed toward proper valuation of assets

4. Assets – Liabilities – Equity of Preference Shareholders = Equity of Ordinary shareholders

Also called the residual equity theory

 Analyzing business transactions using the accounting equation

Following are the nine possible types of transactions which may occur frequently in the basic
accounting equation.

Effects of Transactions Assets = Liabilities + Capital

Transactions affecting both sides of the accounting
equation
a. Increase in assets = increase in capital + +
b. Increase in assets = increase in liabilities + +
c. Decrease in assets = decrease in capital (-) (-)
d. Decrease in assets = decrease in liabilities (-) (-)
Transactions affecting one side of the accounting
equation only
e. Increase in asset = decrease in another asset + (-)
f. Increase in liability = decrease in capital + (-)
g. Increase in liability = decrease in another + (-)
liability
h. Decrease in liability = increase in capital (-) +
i. Increase in capital = decrease in capital + (-)
Illustration:

Assets = Liabilities + Capital

Transactions affecting both sides of the accounting equation
a. Increase in assets = increase in capital + +
1. Investment of owner
2. Rendered services for cash
3. Rendered service on account or billed client for
service rendered

b. Increase in assets = increase in liabilities + +

1. Borrowed money from financial institutions
2. Purchases on account
3. Purchases on account with partial payment

c. Decrease in assets = decrease in capital (-) (-)

1. Withdrawals of the owner
 2. Payment of expenses

d. Decrease in assets = decrease in liabilities (-) (-)

1. Payment of a liability whether partially or full
settlement
2. Returns of defective assets previously purchased on
account

Transactions affecting one side of the accounting equation only

e. Increase in asset = decrease in another asset + (-)
1. Purchases for cash
2. Collection of charge accounts
3. Returns of defective assets previously purchased for
cash

f. Increase in liability = decrease in capital + (-)

1. Accrual of expense
Received Meralco bill for the month

g. Increase in liability = decrease in another liability + (-)

1. Settlement of a liability thru issuance of promissory
note

h. Decrease in liability = increase in capital (-) +

1. Settlement of liability thru additional investment of
the owner

i. Increase in capital = decrease in capital + (-)

1. Payments of expenses thru additional investment of
the owner

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-1
On the space provided, write true if the statement is correct and false if the statement is wrong.

________ 1. Payment of the salaries of the employees is an example of an internal transactions

________ 2. Net loss decreases owner’s equity

________ 3. A transaction could result in a decrease in both asset and expense
________ 4. A decrease in an expense account will cause owner’s equity to decrease.
________ 5. Payment of a note payable with cash will cause owner’s equity to decrease
________ 6. Expenses have the effect of decreasing owner’s equity
________ 7. Revenues have the effect of increasing owner’s equity.
________ 8. Owner’s equity is the residual ownership share of the proprietor over the entity’s assets.
________ 9. Total liabilities are equal to total assets plus owner’s equity
________ 10. Purchase of assets for cash causes total assets to increase.
________ 11. Another form of an accounting equation is Assets – Liabilities = Capital.
________ 12. A transaction always affects both sides of an accounting equation.
________ 13. Withdrawal of asset by the owner causes owner’s equity to decrease.
________ 14. If land is purchased for cash, total assets will not change.
________ 15. Collecting cash on accounts receivable results in increasing cash and decreasing accounts
receivable.
________ 16. Receiving a bill for gas and oil used this month results in a decrease in both owner’s equity
and accounts payable.
________ 17. When an asset was purchased for cash, the owner’s equity account decreases.
________ 18. Providing service on account increases owner’s equity and assets.
________ 19. A financial change in one item is always accompanied by an equal financial change in
another item.
________ 20. Assets are the economic resources owned by a company that are expected to benefit future
periods.
________ 21. Transactions and events are activities that have economic impact for a business enterprise.
________ 22. Recorded transactions should be supported by a source document such as invoices and
purchase orders.
________ 23. Losses from unprofitable operations cause the owner’s equity in a business enterprise to
decrease.
________ 24. When an enterprise received payment from a charge customer, the owner’s equity account
is not affected.
________ 25. The payment of a liability will not affect total assets but will cause total liabilities to
decrease.

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-2
A. Determine the missing amounts on each of the following:

Transaction Assets = Liabilities + Owner’s Equity

1 25,650 15,345 ____________
2 10,000 ____________ 4,568
3 ____________ 56,247 101,258
4 31,000 ____________ 21,000
5 312,015 ____________ 161,452
6 51,975 26,248 ____________
7 ____________ 7,905.25 4,874.75
8 26,000 ____________ 13,654
9 ____________ 14,527 21,648
10 74,560 15,293 ____________

B. For each of the given cases, compute for the unknown

Revenues Expenses Net Income (Loss)

1 954,000 622,400 _________

2 _________ 81,500 16,250

3 624,215 _________ 356,240

4 16,487 _________ (24,680)

 5 _________ 24,148 (16,540)

6 564,000 645,000 _________

7 _________ 64,750 14,250

8 548,250 _________ (246,250)

9 245,168 _________ 14,578

10 _________ 264,785 (17,500)

C. For each of the given cases, compute for the unknown

Case 1 Case 2 Case 3 Case 4 Case 5

Owner’s Equity, Beginning 345,678 678,254 547,392 324,655 ______
Additional Investments 65,000 75,000 200,000 ______ 320,000
Withdrawals 74,000 154,000 ______ 240,000 290,000
Net Income (Loss) 45,000 ______ 220,469 (85,932) (245,963)
Owner’s Equity, Ending ______ 795,146 564,789 365,784 665,890

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-3
Following are the possible effects of a business transaction

A Increase asset and increase capital

B Increase asset and increase liability
C Decrease asset and decrease capital
D Decrease asset and decrease liability
E Increase asset and decrease another asset
F Increase liability and decrease another liability
G Increase capital and decrease capital
H Increase capital and decrease liability
I Increase liability and decrease capital

Select your answer from above. Write only the letter of your choice on the space provided.

___________ 1. Purchased office equipment for cash

___________ 2. Paid an accounts payable
___________ 3. The owner invested cash in the business
___________ 4. Borrowed money from a neighbor to be use in the business by signing a note
___________ 5. Purchased office supplies on account
___________ 6. Received cash on account from a charge customer
___________ 7. Purchased several furniture on account
___________ 8. Returned defective furniture purchased in No. 7
___________ 9. The owner withdrew cash for personal use
___________ 10. The owner made an additional investment of cash in the business
___________ 11. The owner signed a note and borrowed money from a friend for use in the
business
___________ 12. Bought truck for cash
___________ 13. Received cash from customer for service performed
 ___________ 14. Paid wages of employees
___________ 15. Paid rent for the month
___________ 16. Purchased additional office equipment on account
___________ 17. Earned service revenue on account
___________ 18. Received a bill for advertising due the following month
___________ 19. Collected cash from customers on account
___________ 20. Received and paid utility bills for the month

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-4
Following are the possible effects of a business transaction

Assets Liabilities Owner’s

Equity
A. + +
B. + +
C. (-) (-)
D. (-) (-)
E. + (-)
F. + (-)
G. + (-)
H. + (-)
I. (-) +

Select your answer from above. Write only the letter of your choice on the space provided.

______ 1. The owner invested cash as initial investment

______ 2. Billed a customer for service rendered
______ 3. Paid rent of office space for the month
______ 4. Borrowed money from a bank and signed a promissory note
______ 5. Collected the amount billed in No. 2
______ 6. Purchase equipment on account
______ 7. Bought supplies for cash
______ 8. Partial payment was made on purchase of office equipment in No. 6
______ 9. Received cash for service rendered
______ 10. Received and paid utility bills
______ 11. The owner withdrew cash for personal use
______ 12. Received a bill from Daily Inquirer for advertising
______ 13. Paid gas and oil expense
______ 14. Paid bill for advertising recorded in No. 12
______ 15. The balance in No. 8 becomes due. However, cash is not available, issued a
promissory note instead
______ 16. Determined that ½ worth of supplies had been consumed during the month
______ 17. Paid salaries of employees
______ 18. Received cash for service rendered
______ 19. The owner made an additional investment in cash
______ 20. Paid gas and oil expenses
NAME: __________________________ DATE: __________ SCORE: _____
SECTION: __________________________ PROF: __________________________

ACTIVITY 2-5
For each of the following transactions given below, indicate its effects on the accounting equation by entering
a plus sign (+) for an increase and a minus sign (-) for a decrease.

a. Deposited cash in a bank account for his business name, DAN’S BEAUTY HAVEN
b. Paid rent for May
c. Purchased Beauty Supplies on account
d. Received cash from cash customers
e. Purchased Shop Equipment on account
f. Returned defective equipment purchased on account
g. Paid creditors on account
h. Paid miscellaneous expense
i. Withdrew cash for his son’s birthday celebration
j. Rendered services to charge customers
k. Received cash from charge customers
l. Paid salaries and other expenses
m. Received a bill for advertising
n. Secured a loan from a financial institution
o. Paid telephone and electricity for the month

Transaction Assets = Liabilities + Owner’s Equity

A + +
B _________ _________ _________
C _________ _________ _________
D _________ _________ _________
E _________ _________ _________
F _________ _________ _________
G _________ _________ _________
H _________ _________ _________
I _________ _________ _________
J _________ _________ _________
K _________ _________ _________
L _________ _________ _________
M _________ _________ _________
N _________ _________ _________
O _________ _________ _________
NAME: __________________________ DATE: __________ SCORE: _____
SECTION: __________________________ PROF: __________________________

ACTIVITY 2-6
For each of the following transactions given below, indicate its effects on the accounting equation by entering
a plus sign (+) for an increase and a minus sign (-) for a decrease.

a. G.O.A. invested cash in the business

b. Purchased equipment for cash
c. Purchased supplies on account
d. Received cash for service performed
e. Rendered service on account
f. Collected cash from customers on account
g. Paid for the supplies purchased in (c).
h. Withdrew cash for personal use
i. Paid wages for the month
j. Received and paid electric bill
k. Received utility bills for the month
l. Borrowed money from a bank and issued a promissory note
m. Paid rent of the office space
n. Billed a customer for service performed
o. The promissory note was paid
p. Paid for miscellaneous expense

Transaction Assets = Liabilities + Owner’s

Equity
A + +
B _________ _________ _________
C _________ _________ _________
D _________ _________ _________
E _________ _________ _________
F _________ _________ _________
G _________ _________ _________
H _________ _________ _________
I _________ _________ _________
J _________ _________ _________
K _________ _________ _________
L _________ _________ _________
M _________ _________ _________
N _________ _________ _________
O _________ _________ _________
P _________ _________ _________
NAME: __________________________ DATE: __________ SCORE: _____
SECTION: __________________________ PROF: __________________________

ACTIVITY 2-7
Give the effects of the following transactions by checking the appropriate column

ASSETS LIABILITIES CAPITAL

Increase Decrease Increase Decrease Increase Decrease
1. Purchased office equipment on
account
2. Paid rent for the month
3. Purchased office supplies on
account
4. Received cash from clients on
account
5. Paid premium on automobile
insurance
6. Paid salaries and commissions
7. Recorded revenue earned and billed
the clients during first half of the
month
8. Returned office equipment
purchased on Item 1
9. Paid creditors on account
10. Received cash from cash customers
11. Paid advertising expense
12. Paid automobile expense
13. The owner invested additional
cash in the business
14. Borrowed money from the bank
and issued a promissory note
15. The owner withdrew cash for
personal use
16. Received and paid utility bills for
the month
17. Received a bill for gas and oil
18. Purchased additional equipment for
cash
19. Supplies used during the month
20. Collected cash from customers in
Item 7

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-8
The following are selected transactions of ANSARAP RESTORAN. Record the transactions in the tabular
form below. The first transaction is given as an example.

0. M. Custodio invested P180,000 cash in the business.

1. Bought equipment for cash, P24,000
 2. Bought food supplies on account, P8,000
3. Received P36,000 cash for service performed
4. Billed customers for service performed, P40,000
5. Received and paid electric bill, P1,200
6. Paid wages for the month, P18,000
7. Returned P1,800 worth of supplies purchased in Item 2
8. Paid creditors on account, P4,000
9. M. Custodio withdrew P8,000 for personal use.
10. Received P34,400 cash from charge customers

ASSETS LIABILITIES OWNER’S

EQUITY

Cash Accounts Equipment Supplies Accounts M. Custodio

Receivable Payable Capital

0. 180,000 180,000
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Totals

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-9
Using the form below, indicate the effects of each given transaction on the balance of the assets, liabilities and
equity of the business. Use parentheses to indicate deductions.

May 1 The proprietor made initial cash investment of P200,000 in the business
2 Paid for the required permits and licenses before the start of business operations, P2,400
4 Bought furniture on cash basis, P25,000
6 Bought equipment from Superior Equipment Store on credit terms, P49,600
10 Paid for supplies to be used in the operations, P9,000
 15 Paid the rent for the current month, P20,000
15 Rendered service to the clients on cash basis, P49,000
18 Rendered service to the clients on credit term basis, P10,000
20 Made partial payment on the amount due to Superior Equipment Store, P20,000
24 Collected from clients, to apply on account, P6,000
28 Obtained a P50,000 loan from bank
30 Withdrawals of the proprietor, for his personal use, P50,000
30 Received Meralco bill for the month, P4,500
30 Paid salaries of 2 helpers, P12,000
31 Received and paid bill for gas and oil, P2,600

ASSETS LIABILITIES OWNER’S

EQUITY
Date Cash Accounts Equipment Furniture Accounts Bank Capital
Receivable Payable Loan

Totals

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-10
D.M. Nieto is engaged in rendering catering services. As of the beginning of September of the current year,
his business has the following balances:

Cash P 71,300
Accounts Receivable 49,600
Catering Supplies 3,900
Catering Equipment 271,400
Accounts Payable 38,700
D.M. Nieto, Capital 357,500

During September, the following transactions were completed:

September 2 Nieto increased his investment by P20,000 cash

4 Paid the rent of the current month, P7,500
 7 Purchased additional catering equipment on account from ABC Equipment Co.
P70,000
10 Purchased catering supplies for cash, P5,500
11 Completed catering services for clients, P90,000, collected P40,000, balance to be
paid in 7 days
18 Collected P45,000 from clients for catering service completed last week
21 Paid the utility bills, P2,500
24 Billed clients for catering services rendered , P20,000
26 Collected P36,000 from clients on account
26 Nieto withdrew cash for his personal used, P4,500
28 Paid in full the amount due from ABC Equipment Co.
30 Paid the salaries of helpers, P30,000
30 Rendered catering services to old client on account, P50,000
30 Consumed P2,500 worth of supplies
30 Received bill for advertising, P3,0000

Required:
1. Using the form on the next page, indicate the effects of each given transaction on the balance of the
assets, liabilities and equity of the business. Use parentheses to indicate deductions.
2. Prepare an income statement for the month ended September 30
3. Prepare a balance sheet as of September 30

Date Cash Accounts Catering Catering Accounts D.M. Nieto, Capital

Receivable Supplies Equipment Payable Capital Notations

Totals

________________________
________________________
________________________

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

________________________
________________________

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

NAME: __________________________ DATE: __________ SCORE: _____

SECTION: __________________________ PROF: __________________________

ACTIVITY 2-11
Below is a summary financial data of E.C. Morato’s business on December of the current year. Each line
designated by a letter indicates the effect of the transactions on the equation.

Required: Describe each of the transactions

Cash Supplies Equipment Liabilities Capital
30,000.00 60,000.00 15,000.00 5,000.00 100,000.00
a. (5,000.00) 5,000.00
25,000.00 65,000.00 15,000.00 5,000.00 100,000.00
b. (3,000.00) 3,000.00
22,000.00 65,000.00 18,000.00 5,000.00 100,000.00
c. 20,000.00 20,000.00
22,000.00 85,000.00 18,000.00 25,000.00 100,000.00
d. 25,000.00 25,000.00
47,000.00 85,000.00 18,000.00 25,000.00 125,000.00
e. (18,000.00) (18,000.00)
47,000.00 67,000.00 18,000.00 25,000.00 107,000.00
f. (3,000.00) (3,000.00)
44,000.00 67,000.00 18,000.00 25,000.00 104,000.00
g. (15,000.00) (15,000.00)
29,000.00 67,000.00 18,000.00 10,000.00 104,000.00
h. (2,500.00) (2,500.00)
 26,500.00 67,000.00 18,000.00 10,000.00 101,500.00
i. 2,000.00 2,000.00
26,500.00 67,000.00 20,000.00 12,000.00 101,500.00
j. 5,000.00 (5,000.00)
26,500.00 67,000.00 20,000.00 17,000.00 96,500.00

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Self-Test 2 - Multiple Choice. Encircle the correct answer.

1. Net loss will result if

a. Assets is less than liabilities c. Assets exceeds revenues
b. Expenses exceeds revenues d. Revenues exceeds expenses
2. The fundamental accounting equation is
a. Assets – Liabilities = Capital c. Assets – Equity = Liabilities
b. Liabilities + Capital = Assets d. Assets + Liabilities = Capital

3. Which of the following statements is correct?

a. For every value received, there is always an equal value parted with
b. Double-entry bookkeeping system assumes that every transaction involves a simultaneous
value received and value given up
c. Double-entry bookkeeping system assumes that every transaction would simultaneously
affect two accounting elements
d. All business transactions result in a simultaneous increase in two accounting elements or a
simultaneous decrease two accounting elements

4. Which of the following would have no effect on owner’s equity?

a. Purchase of equipment with the proceeds of a bank loan
b. Withdrawal of assets by the owner
c. Net loss
d. Investment of cash by the owner

5. Which of the following changes would most likely result to an increase in asset?
a. Decrease n liability c. Decrease in income
b. Increase in capital d. Increase in expense
6. The underlying assumption that assets purchased by a business are to be recorded at their purchased
price is called
a. Historical cost concept c. Money measurement concept
b. Business entity concept d. Going-concern concept
7. Advertising costs incurred are typically treated as expenses in the period incurred under the
a. Cash basis c. Accrual basis
b. B. historical cost d. materiality

8. Who among the accountants should be completely independent of the firm or organization whose
financial data is being examined
a. Internal auditor c. Controller
b. Budget director d. Public accountant

9. A company that makes toys and sells them to a retailer is a

a. Partnership c. Manufacturing company
b. Service company d. Merchandising company

10. A single proprietor decided to use the same bank account for his personal affairs and that of his
business. What accounting concept is violated by this practice?
a. Accounting entity c. Gong concern
b. Measuring unit d. objectivity

11. The form of business ownership in which the owner’s cannot be held personally liable for the
liabilities of a business is a
a. Proprietorship c. Corporation
b. Partnership d. Both (a) and (b)

12. Accounting, by definition:

a. is simply a mechanical process that records economic activity
b. is applicable only to profit-seeking business organizations
c. involves identifying, measuring and communicating economic information
d. is an evaluation and decision-making process

13. A profit making business that is separate legal entity and in which ownership is evidenced by shares
of stock is known as a:
a. Partnership c. Single proprietorship
b. Corporation d. Sole proprietorship

14. This is the field of accounting in which persons performs cost accounting, management accounting,
and internal auditing:
a. Private accounting c. Government accounting
b. Public accounting d. None of these

15. Net income will result during a time period when:

a. Assets exceeds liabilities c. Assets exceed revenues
b. B. expenses exceed revenues d. Revenues exceed expenses

16. An example of a transaction that increases an asset other than cash and increases
revenue is:
a. Rent is prepaid for the nest year and is not included on the income statement.
b. Services are performed on account.
c. Cash is received on accounts payable.
d. None of the above

17. Which of the following transactions have no impact on owner’s equity?

a. Purchase of land with the proceeds of a bank loan.
b. Withdrawal of assets by the owner
c. Net loss
d. Investment of cash by the owner

18. Which of the following transactions would cause total assets to change?
 a. Payment of cash for a new computer.
b. Received cash from a customer as payment on account.
c. Borrowed money from a bank, signing a promise to pay six months later.
d. Purchased of office supplies for cash.

19. As of December 31, 2008, Advento Company has assets of P35,000 and owner’s equity of P20,000. What are the
liabilities the liabilities for Advento Company as of December 31, 2008?
a. P15,000 c. P10,000
b. P25,000 d. P20,000

20. Owner’s equity will change over time because of several factors. Which of the following factors
would explain an increase in owner’s equity?
a. Net loss and investments by the owner
b. Investments by the owner and net income
c. Withdrawal of assets by the owner and net loss
d. Withdrawal of assets by the owner and net income
21. Assets are:
a. Things of value that are owned
b. Economic resources that are owned
c. Desired because of the future benefits they are expected to yield
d. All of the above

22. A withdrawal by the owner has all of the following effects except:
a. Reducing total assets
b. Reducing owner’s equity
c. Reducing the balance of the cash account
d. Reducing the net income reported for the period.

23. Which of the following equations cannot be derived from the basic accounting equation ( Assets =
Liabilities + Owner’s Equity)
a. Assets – Liabilities = Owner’s Equity
b. Liabilities = Assets – Owner’s Equity
c. Owner’s Equity = Liabilities – Assets
d. Assets – Owner’s Equity = Liabilities
24. Which of the items below would be accounted for as an expense?
a. Payment of the current period’s rent
b. Repayment of a bank loan
c. Withdrawal of assets by the owner
d. Purchase of land for cash

25. Which of the following is incorrect?

Assets Liabilities Capital
a. P19,625 P3,125 P16,500
b. P20,500 P7,000 P13,500
c. P23,870 P2,875 P20,500
d. P16,350 P2,800 P13,550

26. The properties owned by a business enterprise are called:

a. Assets c. Accounts receivable
b. Liabilities d. Owner’s equity

27. Which of the following is not an asset?

a. Supplies c. Loan to Maricel Garcia
b. Furniture & fixture d. Loan from JJ Jimenez

28. Which of the following is correct?

 a. Profit does not affect owner’s equity
b. Profit decrease owner’s equity
c. Owner’s equity can only come from profit
d. Profit increases owner’s equity

29. A revenue is:

a. An intangible asset
b. A property or economic resource owned by an individual or enterprise
c. An inflow of assets, not necessarily cash, in exchange for goods and services sold.
d. A debt owed

30. Collection on accounts receivable will

a. increase total assets and increase owners equity
b. Have no effect on total assets, but will increase total owner’s equity.
c. Decrease on both assets and total liabilities
d. Have no effect on total assets, liabilities, or owner’s equity
31. The accounting equation
a. shows the relationship between revenues and expenses for the period
b. must be in balance at the end of the year but will normally balance during the year
c. shows the relationship between cash and owner’s equity
d. reflects the assets of the business and the equities in those assets

32. If the assets of the business increased P120,000 during a period of time and its liabilities increased
P48,000 during the same period, owner’s equity in the business must have
a. Increased P72,000 c. Increased Pi68,000
b. Decreased P72,000 d. Decreased P168,000
33. De Castro Company’s current accounting equation showed an increase in owner’s equity of P275,000
over the previous year but no change in liabilities. The current accounting equation would list asset
of
a. P275,000 more than the previous year
b. P275,000 less than the previous year
c. No change from the previous year
d. The accounting equation does not reflect assets
34. Equities include
a. Assets and liabilities c. Liabilities and Owner’s equity
b. Assts and owner’s equity d. Only liabilities
35. If revenue was P303,750, expenses were P253,120, and the owner’ withdrawals were P67,500. The
amount of net income or net loss was
a. P303,750 income c. P253,20 loss
b. P50,630 income d. P16,870 loss
36. The purchase of land by paying cash causes
a. an increase in one asset and decrease in another
b. an increase in owner’s equity and a decrease in an asset
c. An increase in an asset and an increase in a liability
d. None of the above
37. Which of the following will decrease the total assets
a. Acquired equipment. Terms: cash
b. Sold merchandise on account
c. Recognized expenses incurred but have not yet been paid for
d. Paid for the matured loan to the bank
38. Which of the following changes would most likely result to an increase in liability?
a. Increase in asset c. Increase in revenue
b. Increase in capital
 d. Increase in gain
39. Which of the following will increase the owner’s equity?
a. Withdrawal for personal use
b. Payment of rent during the period
c. Service rendered to clients on account basis
d. Collection from a client to apply on his open balance
40. The economic resources that a business owns and expects to be useful in the enterprise are called
a. Assets c. Receivables
b. Liabilities d. Owner’s equity

41. The purchase of office supplies on cash basis will

a. Increase an asset and increase owner’s equity
b. Increase one asset and decrease another asset
c. Increase asset and increase liability
d. Increase asset and decrease liability
42. The rendering of service to a customer on account will
a. Increase an asset and increase owner’s equity
b. Increase one asset and decrease another asset
c. Increase asset and increase liability
d. Increase asset and decrease liability
43. Settlement of accounts payable through issuance of a promissory note will
a. Increase an asset and increase owner’s equity
b. Increase one asset and decrease another asset
c. Increase asset and increase liability
d. Increase liability and decrease another liability
44. Payment of a liability will
a. Decrease asset and decrease liability
b. Increase one asset and decrease another asset
c. Increase asset and increase liability
d. Increase asset and decrease liability

45. Which of the following changes would most likely result in a decrease in the capital of the
owner?
a. Increase in asset c. Increase in expense
b. Decrease in liability d. Increase in income

46. Which financial statement is most useful in assessing the profitability of the business enterpr ise?
a. Balance sheet c. Statement of Capital
b. Income statement d. Statement of Cash Flows
47. Recognition of income would generally result in
a. Increase in owner’s equity c. Outflow of liability
b. Inflow of assets d. All of these

48. Recognition of expense would generally result in

a. Decrease in owner’s equity c. Increase in liability
b. Decrease in assets d. All of these

49. Which of the following will not appear in the income statement?
a. Revenues and gains c. Net income or net loss
b. Expenses & losses d. None of these

50. Which of the following will not be reported in the statement of cash flows?
a. Results of investing activities c. Results of operations
b. Results of financing activities d. Results of negotiations with labor unions