Chapter II ANALYZES OF ACCOUNTING TRANSACTION OBJECTIVES: At the end of the chapter, the student will be able to: * Define business transaction and its importance to organization; * Identify the elements of accounting equation; ¢ Explain how business transactions are recognized using accounting equation; erica * Demonstrate the fie of business transactions in accounting expanded equation;: sie ¢ Illustrate how.to prepare company's financial statements; and Explain the accounts that affect the balarice shéet, income statement, statement of equity and statement of cash flow. CHAPTER CONTENT: BUSINESS TRANSACTION The nature of business is to earn profit, and it becomes possible by building good relationship with suppliers; employees, investors and other stakeholders. These stakeholders are the source of the company in creating the s0-calléd business trangaction, whith are the-business events and: economic activities, that are. measurable i in monetary and non-monetary value. Arganda stated that, “internal transactions” are activities that involves one enterprise and another enterprise, while external transactions are activities performed within the enterprise.” It is better to know which transaction affects the financial statement. Business transactions that may affect balance sheet are assets, liabilities and owner's equity, while transactions that affect income statement are revenues/income and expenses. On the latter part of the chapter, you will be able to know how these transactions are presented on financial reports. 31ACCOUNTING EQUATION In accounting system, business transactions should be recorded, classified, summarized and interpreted. Alll of these functions of accounting cannot be made unless you follow the basic accounting equations. Accounting equations can be defined as: * It is also known as balance sheet equation, because it represents the relationship of three elements such as assets, liabilities and owner's equity. It is the foundation of double-entry bookkeeping system. Double Entry bookkeeping system is recording of transaction that requires equal balance of the total amount both debits and credits. Hernane, stated that accounting equation is “assets is equal to equity. Equity is the right to properties, these are the equity to creditors (liabilities), and the equity of the owners (capital).” Assets = Equity; Thus, this equation is mostly applied; pesgit Assets = Liabilities + Owner's Equity my the assets and the right sides are liabilities and owner's equity. From the given equatioh).we éan also derive the following equation. ws Assets - Liabilities + Owner's Equity and ‘ ....Assets = Owner's. Equity = Liabilities : “ACCOUNTING EQUATION EXPANDED In the accounting equation expanded, the accounting equation should always be balanced. The effects of each transaction will either increase or decrease the elements of each accounting equation, Remember that owner's equity increases by investment of an owner, earned income/revenue, and it decreases due to incurred expenses and personal drawings of the owner. Assets = Liabilities + Owner's Equity To further illustrate this is how transaction increases or decreases in the accounting equation. 32Illustration. (1) Tom Cruz opened a law firm and invested P50,000 cash. Accounting Equation a Cash__P50,000 =0 Cruz, Capital P $0,000 Analysis: Increase in Assets (Cash) P Increase in Owner's Equity 50,000 (Cruz, Capital) P50,000 (2) She purchased office supplies worthP’5,000 on credit from See Enterprise. Accounting Equation: A = L + OE Office Supplies P5,000 ‘Accounts Payable P5,000 0 Analysis: Increase in Office Supplies P5,000 | Increase in Accounts Payable P5,000. ’ (3) Billed B, Castillo, for services rendered, P 12,000. , i ‘ Accounting Equation: , , ee A lene emesco| OE Cruz, Capital (Servite Rev- Accounts Receivable P12,000 0 eon) PI2.000 Analysis: Increase in Owner's Equity Increase in Assets > Cruz Capital (Accounts Receivable) because Service 12,000 Revenue rendered 12,000. 33(4) He bought tables and chairs for the business, P 6,000. Accounting Equation: [ A + Tables and Chairs 6,000 Cash P 6,000 Analysis: Increase in Assets (Furniture and Fixtures ) P 50,000 Decrease in Other Assets (Cash) P6,000 (5) Tom Cruz issued promissory. , no! (transaction no. 2.) 3S: to. ‘See “Enterprise in payment Accounting Equation: C + + Notes Payable 5,000, = Accounts Payable P5,000 Analysis: ~; ]tvotes Payabie) P 5,000 ~ Decrease in Other Liabiltties:~ (Accounts Payable) P 5,000 (6) Paid the salary of clerk, P 5,000 and utility expense for P 3,000. Accounting Equation: A OE Cruz, Capital P8,000 (5,000 + 3000) Cash 5,500 (2,500 + 3,000) 34Analysis: Decrease in Owner's Equity , > Cruz, Capital because of incurred Salary Expense, 5,000, Utilities Expense, 3,000 Decrease in Cash P 8,000 (7) Paid the note issued to See Enterprise. Accounting Equation: { A = aL OE [cash's,000 1 [ Notes Payable P 5,0002-- 0 Analysis: Decrease in Liabiliti (Notes Payable) PS, [_oraeincan son (8) Tom Cruz withdrew P. 15) i000 from the Sechrest his personal use. Accounting Equation: Cash P15,000 Cruz, Capital P15,000 Analysis: Decrease in Owner's Equity > Cruz, Capital (Cruz, Drawing ) 15,000. Decrease in Cash P50,000 (9) Tom Cruz paid for utilities expenses, P 3,000, Accounting Equation: A = L + OE Cash P3,000 o Cruz, Capital P3,000 35Analysis: Decrease in Owner's Equity Decrease in Cash P3,000 > Cruz, Capital (Utilities Expense) P3,000. The computation below shows you the total picture of each transaction. ‘Transaction Assets Liabilities ‘Owner's Equity a) Cash Office Accounts Furniture Accounts Notes Cruz, Supplies Receivable Payable Payable Capital P 0,000 $0,000 Balance 50,000 50,000 @ 5,000. ' 5,000 Balance 50,000 5,000 | 5,000 50,000 8 12,000 Balance 50,000 5000. 12,000 5,000 50,000 (4) =6,000 6,000 i 12,000 Balance 44,000 i 5,000 12,000 6,000 5,000 62,000 (5) =5000 5,000 Balance 44,000 5,000 A; 12,000 6,000 5,000 62,000 (6) -8,000 5 -8,000 Balance 36,000 500012000 «6,000 5,000 54,000 ~~ ~5,000 5,000 Balance 31,000 5,000 12,000 6,000 0 54,000 8) ~ 15,000 15,000 Total P 16,000 5,000 12,000 6,000 o 39,000 The transactions above are summarized in the balance sheet, income statement, and owner's equity. 36Tom Cruz Law Firm Balance Sheet As of the Month January 31, 2012 Assets. Liabilities and Owner's Equity Liabilities Cash P 21,500 Accounts Payable P 0 Accounts Receivable 12,000 Notes Payable 0 Office Supplies 5,000 Total Liabilities Po Furniture 6,000 Owner's Equity ——— Cruz, Capital P 39,000 Total Owner's Equity 39,000°* Total Assets 39,000 Total Liabilities and Owner's Equity P. 39,000°* Tom Cruz Law Firm; , Statement of Owner's Equity For the Month Ended Januiary 31, 2012 | T. Cruz, Capital, Jan. 2012 Re | ‘Add: Investment in January, P- 50,000 : Net income for the month * 4.000" curt Total 54,000 } Léss: T. Cruz, Drawing «> 45,000) } T. Cruz, Capital, Jan. 31, 2012 _ = -P..-39,000% } Tom Cruz Law Firm * Income Statement re ) For the Month Ended January 31, 2012 re ry pedal REVENUES: Service Revenue P12,000 OPERATING EXPENSES: Salary Expense P 5,000 Utility Expense 3.000 ' Total Operating expenses ~ 8.000 PROFIT FROM OPERATIONS 4,000 | 37EXERCISE A Direction: Determine the effects to capital of each given transaction. mpange Increase in one assets, decrease in another assets . Increase in an asset, increase in liability . Increase in an assets, increase in capital Decrease in an asset, decrease in liability ._ Decrease in an asset, decrease in capital Increase in liability, decrease in capital. 1. Performed services to clients on an account. 2. Received payments from clients from previously billed for services rendered on account. 3. Purchased supplies on account. 4. Issued check in payment for supplies purchased on account. 5, Billed customer for services rendered on account. 6. Paid Meralco bill for the light and power consumed for the month. 7. Received a bill from PLDT but payment is to be made next month. 8, The owner invested additional cash to the business. 9. Rendered services to clients receiving a promissory note. 10. The owner withdrew cash for personal use. 39EXERCISE B Direction: Solve the following problems using the accounting equation. 1. The assets Agnes Tan Enterprise amounting to P 950,000 and the owner's P560,000, What is the amount of liabilities? The liabilities and owners equity of Jackie Tyan amount to P 5,980,000 and 3,200,300 respectively. How much is the company’s assets? Logi Company has owner's equity of P 7,940,100 and total sales of P10,670,000. How much is the creditors’ equity? The liabilities of Hans Company are equal to 1/3 of the total assets. The ‘owner's equity is P 2,400,200. What is the amount of liabilities? At the beginning of the year, Market Company's assets amount to P 16,000,000 and the owner's equity amounting to P 5,000,000. During this year, assets increased by P 3,000,000, while liabilities decreased by P 500,000. How much is the owner's equity at the end of the year? Mel Gibson is the owner of MG Laundry. At the end if the accounting period, Dec, 31, 2011, the business has a total assets of P P 4,162,500 and liabilities of P 1,710,000. How much is Mel Gibson's capital as of December 31, 2011 ? At the beginning of the year 2012, Telekom Company has a total assets of P 3,560,000 and total liabilities of P 980,000, During the year 2012, assets ‘decreased by P 600,000 while liabilities increased by P 850,000. How much is the owner's equity at December 31, 2012? At the end of the year 2012, ABC company has a total assets of P 5,450,000 and total liabilities of P 1,980,000, During the year of 2012, assets increased by P 750,000 while liabilities increased by P 300,000. What is the amount of capital at the Beginning of 2012?__. The total assets of XYZ company is P 8,000,000, then the total capital is P 4,500,000. How much is the total liabilities of XYZ company? . If the total liabilities of Masaya Company is P 3,500,500, then capital is P 7,500,000. How much is the total assets of Masaya Company? 41EXERCISE C Direction: The following are transaction of Ms. Jelai Castillo, an interior decorator in her first month of business operation. Sept. 2 Invested P 1,000,000 cash in business. 3 Bought for cash a used car for P 250,000 for use in the business 9 Purchased supplies on account. ?00 11 Purchased supplies on account, P 7,000. 12 Received a check from a customer for services rendered for cash, P 10,500. 15 Paid 2,500 cash for advertising the start of the business. 16 The owner invests additional P 100,500 cash in business. 17 Purchased equipment worth P 50,000. Issued a promissory note payable. 18 Issued check in payment for supplies purchased on Sept. 9. 20 Received P 15,000 for cash for customers billed on Sept. 11. 21 Purchased additional office supplies for cash, P 5,000. 22 Issued check in payment for the promissory note issued on Sept. 17. 23 Paid creditor on account, P 3,500. 28 Withdrew P 5,200 cash for personal use, 30 Salaries of assistant, P 12,000. Required: Determine the value received and value parted with, then prepare journal entry. Use the format. 43Value Received | Value Parted With Journal EntryEXERCISE D Direction: Using the same data of Exercise C. Determine the following information based on the given data. Effects to Account Date Journal Entry Caran. of Increase or Decrease 45EXERCISE E RU Repair Shop started June 1, of the current year by RJ Madela (the owner). Asummary of July transactions are the following. 1 Invested P 60,000 cash to start the repair shop. 4 Purchased equipment for P 20,000 cash, 7 Paid P 8,000 cash for June office rent. 9 Paid P 10,000 cash for supplies purchased. 10 Provided repair services on account to customer, P 8,000. 11 Incurred P 5,000 for advertising costs in the Bulletin Today on account. 12 Received P 16,400 in cash from customers for repair services. 16 Withdrew P 10,000 cash for personal use. 19 Paid part time employees salaries P 4,000. 23 Paid utility bills P 4,800. 30 Collected cash of P 4,800 for services billed in transaction. Required: a) Prepare tabular analysis of transaction, using the following format. b) Prepare for the following financial statements; b.1, Statement of Comprehensive Income (Income Statement) b.2, Statement of Owner's Equity ( Statement of Capital) b.3. Statement of Financial Position ( Balance Sheet) 47Assets = Liabilities+ | Owner's Equity ‘Accounts Supplies | Equipment Payable RJ. Capital == % Total Ss Assets . | Uabitities= | Owner's Eauity Statement of Comprehensive Income (Income Statement ‘Accounts. Date | Cash | Recelvable Jul 4849 Statement of Owner's Equity (Statement of Capital) Statement of Financial Position (Balance Sheet)