Types and Effects of

TRANSACTI
ONS
AGUSTO, John Patrick
• 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 procedure involved.
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 cdairns (liabilities or 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.
The four types of transactions above may be further expanded into
nine types of effects as follows:

1. Increase in Assets = Increase in Liabilities (SA)

2. Increase in Assets = Increase in Owner's Equity (SA)
3. Increase in one Asset =Decrease in another Asset (EA)
4. Decrease in Assets =Decrease in Liabilities (UA)
5. Decrease in Assets = Decrease in Owner's Equity (UA)
6. Increase in Liabilities = Decrease in Owner's Equity (EC)
7. Increase in Owner's Equity =Decrease in Liabilities (EC)
8. Increase in one Liability =Decrease in another Liability (EC)
9. Increase in one Owner's Equity = Decrease in another Owner's
Equity (EC)
Typical Account
TITLE USED
STATEMENT
OF FINANCIAL
POSITION
 ASSETS
-Assets are should be classified only into two: current assets and non-
current assets. Philippine Accounting Standards (PAS) No. 1, an
entity shall classify assets and current when:

a. It expects to realize the asset, or intends to sell or consume it, in its

normal operating cycle;
b. It holds the asset primarily for the purpose of trading;
c. it expects to realize the asset within twelve months after the
reporting period, or
d. the asset is cash or a cash equivalent (as defined in PAS No. 7)
unless the asset is restricted from being esxhanged or used to
settle a lability for at least twelve months after the reporting
period.
Operating cycle
-is the time between the acqulsition of
assets for processing and their
realization in cash or cash
equivalents .
CURRENT
ASSETS
DIMAYACYAC, Sharmaine
 CURRENT ASSETS
 all the assets of a
company that are expected
to be sold or used as a
result of standard business
operation over the next
year
 CASH
 cash is any medium of exchange that a bank will accept for
deposit at face value

 includes coins, currency, checks, money orders, bank

deposits and drafts

CASH EQUIVALENT
 these are short-term

 highly liquid investments that are readily convertible to known

amounts of cash and which are subject to an insignificant risk of
changes in value (PAS No.7)
 NOTES RECEIVABLE
a written pledge that the customer will pay
the business a fixed amount on a certain
date
ACCOUNTS
RECEIVABLE
 claims against customers arising from sale of
services or goods on credit

 a type of receivable that offers less security than a

promissory note
 INVENTORIES
per PAS No.2, these are assets which are:

(a) held for sale in the ordinary course of

business;
(b) in the process of production for such
sale; or
(c) in the form of material or supplies to be
consumed in the production process or in
the rendering of services
 PREPAID EXPENSES
 are the expenses paid by the business in
advance

include insurance and rent

these prepaid items represent future

economic benefits-assets-until the time these
start to contribute to the earning process;
these, ten, become expenses
 NON-CURRENT
ASSETS
Noncurrent assets are a company's
long-term investments that are not
easily converted to cash or are not
expected to become cash within an
accounting year
 PROPERTY, PLANT AND
EQUIPMENT
Per PAS No. 16,
 these are tangible assets that are held by
an enterprise for use in the production or
supply of goods or services, or for rental
to others, or for administrative purposes
and which are expected to be used
during more than one period
 TANGIBLE ASSETS
Including:
 land
 building
 machinery and equipment
 furniture and fixtures
 motor vehicles and equipment
 ACCUMULATED
DEPRECIATION
a contra account that contains the sum of the
periodic depreciation charges

the balance in this account is deduct from the cost

of the related asset - equipment or buildings - to
obtain book value
 INTANGIBLE ASSETS
Per PAS No. 38,
 these are identifiable, nonmonetary
assets without physical substance
held for use in the production or
supply of goods or services, for rental
to others, or for administrative
purposes
 INTANGIBLE ASSETS
Including:
 goodwill
 patents
 copyrights
 licenses
 franchises
 trademarks
 brand names
 secret processes
 subscription lists
 non-competition agreements
 LIABILITIES
Per revised Philippine Accounting Standards (PAS) No. 1, an entity shall
classify a liability as current when:
a. it expects to settle the liability in its normal operating cycle;
b. it holds the liability primarily for the purpose of trading;
c. the liability is due to be settled within 12 months after the
reporting period; or
d. the entity does not have an unconditional right to defer
settlement of the liability for at least 12 months after the
reporting period
All other liabilities should be classified as non-current liabilities.
 CURRENT LIABILITIES
 Current liabilities are a company's
short-term financial obligations that
are due within one year or within a
normal operating cycle.
 ACCOUNTS PAYABLE
this account represents the reverse
relationship of the accounts receivable

by accepting the goods or services,

the buyer agrees to pay for them in the
near future
 NOTES PAYABLE
 it is like a note receivable but in a
reverse sense

 the business entity is the maker of the

note; that is, the business entity is the
party who promises to pay the other
party a specified amount of money on a
specified future date
 ACCRUED
LIABILITIES
amounts owed to others for
unpaid expenses

this account includes:

salaries payable
utilities payable
interest payable
taxes payable
 UNEARNED REVENUES
When the business entity receives
payment before providing its customers with
goods or services, the amounts received are
recorded in the unearned revenue account.
When the goods/services are provided to the
costumer, the unearcned revenue is reduced
and income is recognized
 CURRENT PORTION OF
LONG-TERM DEBT

these are portion of mortgage

notes, bonds and other long-term
indebtedness which are to paid
within one year from the balance
sheet date
Non-current
Liabilities
ROSALES, Ruelline
 Non-current Liabilities
Mortgage payable- This account records long-term debt
of business entity for which the business entity has
pledge certain assests as security to the creditor. In the
event that the debt payments are not made, the creditor
can foreclose or cause the mortaged assest to be sold
to enable the entity to settle the claim.

Bonds payable- Business organizations often obtain

substantial sums of money from lenders to finance the
acquisition of equipment and other needed assets. They
obtain these funds by issuing bonds. The bond is a
contract between the issuer and the lender specifying
the terms of reypament and the interest to be charged.
INCOME
STATEMENT
 Income Statement
I
Service Income. Revenues earned by performing
services for a customer or client; for example,
accounting services by a CPA firm, laundry services by
a laundry shop.

Sales. Revenues earnedas a result of sale of

merchandise; for example, sale of building materials by
a construction supplies firm.

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

Telecommunications, Electricity, Fuel and Water

Expenses. Expenses related to use of telecommunications
facilities, consumption of 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 vehicl, health, life, fire,
typhoon or flood) which has expired.

Depreciation Expense. The portion of the cost of a tangible

asset (buildings and equipment) allocated or charged as
expense during an accounting period

Uncollectible Accounts Expense. The amount of

recievables estimated to be doubtful of collection and
charged as expense during an accounting period.

Interest Expense. An expense related to used of borrowed

funds.
Accounting for
Business
TRANSACTIO
NS
LIWAG, Mark Lito
Accountants observe many events that they identify and
measure in financial terms. A business transaction is the
occurrence of an event of condition that affects financial
position and can be reliably recorded.

FINANCIAL
TRANSACTION
Every financial transaction can be analyzed or expressed
in terms of WORKSHEET
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
Leopoldo Medina decided to establish a sole proprietorship business and named it as Medina Graphics
Design. Medina is a graphic designer who has extensive experience in drawing, layout, typography, lettering,
diagramming and photography possesses the talent to visually communicate to a target audience with the right
combination of words, images and ideas.

Medina Graphics Design can do the layout and production design of newspaper magazines, corporate
reports, journals and other publications. The entity can create promotional displays, marketing brochures for
services and products; packaging design for products, and distinctive logos for businesses. He also enters into
agreements with clients for the progressive development and maintenance of their web sites. His revenue stream
comes from web designing. The owner, Leopoldo Medina, makes the business decisions. The assets of the
company belong to Medina and all obligations of the business are his responsibility. Any income that the entity
earns belongs solely to Medina.

When a specific asset, liability or owner's equity item is created by a finance transaction, it is listed in the
financial transaction worksheet using the appropriate accounts. The worksheet that follows shows the first
transaction of the Media Graphics Design. The dates are enclosed in parentheses. During March 2013, the first
month of operations, various financial transactions took place. These transactions are described and analyzed as
follows:
The financial transaction is analyzed as follows:
 An entity separate and distinct from Medina’s personal financial affairs is created.
 An economic resource – cash of 350,000 is invested in the business entity. The source of this asset is the contribution
made by the owner, which represents owner’s equity. The owner’s equity is Medina, Capital.
 The dual nature of the transaction is that the cash is invested and owner’s equity created. The effects on the accounting
equation are as follows: increase in asset – cash from zero to 350,000 and increase in owner’s equity from zero to
350,000
 At this point, the entity has no liabilities, and assets equal owner’s equity
The transaction did not change the total assets but it did change the composition of the assets – it
decreased one asset (cash) and increased another asset (computer equipment) by 145,000. Note
that the sums of the balances on both sides of the equation are equal. This equality must always
exist.
 Mar. 9 Computer supplies in the amount of 25,000 are purchased to account

Assets don’t have to be purchased in cash. It can also be purchased on credit. Acquiring the
computer supplies with a promise to pay the amount due later is called buying an account. This
transaction increases both assets and liabilities of the business. The asset affected is computer
supplies and the liability created is an accounts payable.
The entity earned service income by designing web sites for clients. Medina rendered his service
and collected revenue in cash. The effect on the accounting equation is an increase in asset- cash
and in owner’s equity. Income increases owner’s equity.
Expenses are recorded when they are incurred. Expenses can be paid in cash when they occur, or
they can be paid later. The payment for 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 445,000
The entity has performed services to clients so income should already be recognized. Medina is
entitled to receive payment for these but the clients did not pay immediately. Performing services
creates an economic resource, the clients’ promise to pay the amount which is called accounts
receivable. This transaction resulted to an increase in asset (accounts receivable) and increase in
owner’s equity of 35,000
This transaction is a payment on account. The effect on the accounting equation is a decrease in
the asset (cash) and a decrease in 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 25,000 were received from clients for billings dated Mar. 17

Last March 17, Medina billed clients for services already rendered. On March 20, the entity was
able to collect 25,000 from them. The cash increased by 25,000. The business should not record
income on March 20 since it has already recorded the income last March 17. Total assets are
unchanged. The business merely reduced asset which is the accounts receivable and increased
another which is the cash.
On March 1, Medina invested 350,000 both in cash and owner’s equity increased. The transaction
was an investment by the owner and not an income-generating activity. Medina simply transferred
funds from his personal account to the business. A cash withdrawal is the exact opposite. The
20,000 cash withdrawal transaction resulted to a reduction in both cash and owner’s equity.
Using of
T-ACCOUNTS
 Analyzing and recording transactions using the
accounting equation is useful in conveying a basic
understanding of how transaction affect the business.
However, it is not an efficient approach once the
number of accounts involved increases. Double-entry
system provides a formal system of classification and
recording business transactions
This transaction increased both cash and owner’s equity. The entry is is to debit cash and credit
Medina’s Capital
THAN
K
YOU
GROUP 3
AGUSTO, John Patrick
DIMAYACYAC, Sharmaine
LIWAG, Mark Lito
ROSALES, Ruelline